The ultimate purpose of any retirement fund is to provide vital financial benefits to its members and their dependants. This module provides a comprehensive overview of the various types of benefits offered by retirement funds in South Africa, delves into how they are calculated, and highlights your pivotal role as a trustee in ensuring these benefits are delivered accurately, timeously, and transparently, ultimately fulfilling the fund's promise to its members.
1. Types of Benefits
Retirement funds offer a range of benefits designed to support members at different life stages and unforeseen circumstances. Understanding each type is fundamental to effective trusteeship.
- Withdrawal Benefits:
- What they are: Benefits payable when a member resigns, is dismissed, or retrenched before retirement age.
- Payout Options: Members typically have options to take a cash lump sum (subject to tax), transfer their accumulated value to another approved retirement fund (e.g., preservation fund or another employer's fund), or transfer to a retirement annuity fund.
- The "Two-Pot Retirement System" (Effective 1 September 2024): This significant legislative change alters how withdrawal benefits are accessed. Contributions made from 1 September 2024 will be split into:
- Savings Component: Allows for one withdrawal per year (up to certain limits) before retirement, subject to tax.
- Retirement Component: Remains preserved until retirement, similar to current preservation rules.
- Vested Component: Applies to contributions made before 1 September 2024, generally accessible under old rules.
- Trustee's Role: Guiding members on these options, ensuring correct application of the Two-Pot system, and facilitating transfers or payments in line with fund rules and legislation.
- Retirement Benefits:
- What they are: Benefits payable when a member reaches the fund's specified retirement age.
- Payout Options:
- Lump Sum Cash Withdrawal: Members may take a portion of their retirement benefit as a tax-free or taxable lump sum (subject to limits, especially for pension funds prior to Two-Pot).
- Annuities: The remaining portion must typically be used to purchase an annuity to provide a regular income in retirement.
- Living Annuity: Provides flexibility in drawing an income, but income is not guaranteed and depends on investment performance and drawdown rates.
- Guaranteed Annuity: Provides a guaranteed income for life, typically purchased from a life insurer.
- Trustee's Role: Ensuring members are fully aware of their options, facilitating the transfer to annuity providers, and promoting financial literacy regarding retirement planning.
- Death Benefits:
- What they are: Benefits payable to the dependants and/or nominees of a member who passes away before retirement.
- Critical Note: Governed by Section 37C of the Pension Funds Act, which overrides a member's will. Trustees have a crucial role in identifying dependants and ensuring equitable distribution (detailed in Content Piece 4).
- Disability Benefits:
- What they are: Benefits payable to a member who becomes permanently or temporarily disabled and unable to work.
- Types of Disability: Fund rules define what constitutes disability (e.g., "own occupation" vs. "any occupation").
- Claims Process: Involves medical assessments and often a waiting period.
- Trustee's Role: Overseeing the fair and timely assessment of disability claims, ensuring compliance with fund rules and policy conditions.
- Funeral Benefits:
- Often provided as a supplementary group risk benefit within the retirement fund, offering a lump sum payment to assist with funeral expenses upon a member's or their family's death.
- Trustee's Role: Ensuring prompt payment of valid funeral claims, which can provide crucial immediate support to families.
2. Benefit Calculation and Fund Rules
The specific method for calculating each benefit is detailed within the fund's rules. Trustees must have a thorough understanding of these rules to ensure accurate and compliant benefit payments.
- Contribution-based Calculation: For defined contribution funds (most common in SA), benefits are primarily based on:
- Accumulated contributions (member and employer).
- Investment returns earned on those contributions.
- Less fees, costs, and risk premiums.
- Vesting Scales: For some funds, particularly older provident funds, a vesting scale might apply to employer contributions, meaning members are only entitled to a certain percentage of employer contributions if they leave within a specific timeframe. Trustees must ensure these are correctly applied.
- Risk Premiums: A portion of contributions is often used to pay premiums for group life, disability, and funeral cover. Understanding how these premiums impact benefits is vital.
3. Risk Benefits (Group Life, Disability, Funeral Cover)
Many retirement funds offer group risk benefits through underlying insurance policies. These are crucial safety nets for members and their families.
- Purpose: To provide financial protection against death, disability, or critical illness, typically above and beyond the retirement savings component.
- Trustee's Oversight:
- Selecting Insurers: Trustees are responsible for selecting reputable and financially sound insurers.
- Policy Terms: Understanding the terms and conditions of the group risk policies, including exclusions, waiting periods, and benefit definitions.
- Claims Management: Overseeing the claims process, ensuring it is fair, efficient, and that valid claims are paid timeously. This includes assisting members with documentation and communication with the insurer.
4. Taxation of Benefits
Retirement fund benefits are subject to specific tax rules in South Africa. Trustees must be generally aware of these rules, although the administrator usually handles the precise calculations and deductions.
- Lump Sum Withdrawals: Taxed on a sliding scale, with certain portions being tax-free.
- Lump Sum at Retirement: Different tax tables apply, with a significant portion often being tax-free.
- Annuity Income: Taxed as normal income.
- Death Benefits: Generally paid tax-free to beneficiaries from a retirement fund (unless transferred to a taxable vehicle).
- Trustee's Role: Ensuring the administrator applies the correct tax treatment to all benefits paid out, to avoid members facing future tax liabilities or penalties.
5. Communication of Benefits to Members
Effective and transparent communication about benefits is a cornerstone of trustee responsibility. Members need to understand what they are entitled to and how their benefits work.
- Benefit Statements: Issuing clear, concise annual benefit statements that accurately reflect members' values, contributions, and projected benefits.
- Member Workshops/Education: Conducting workshops or providing educational materials to explain complex concepts like the Two-Pot system, annuity options, and financial planning.
- Accessibility of Information: Ensuring fund rules, benefit summaries, and contact details are easily accessible to members.
Trustee Responsibilities: A Summary
Your role as a trustee is pivotal in ensuring that the fund delivers on its promise of financial security. This includes:
- Accurate Administration: Overseeing the accurate and timeous calculation and payment of all benefits in accordance with fund rules and legislation.
- Claims Management: Diligently reviewing and approving all benefit claims (withdrawal, retirement, death, disability, funeral).
- Legislative Compliance: Ensuring the fund complies with all relevant sections of the Pension Funds Act, especially Section 37C and the new Two-Pot regulations.
- Member Education: Empowering members with clear, accessible information about their benefits and options.
- Administrator Oversight: Monitoring the administrator's performance in benefit processing and member communication.
Next steps
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