The pros and cons of workplace retirement plans

Published on 30th March, 2022 at 04:20 pm

Many people don’t save for retirement through their employer owing to a lack of knowledge about the available benefits. We look at the pros and cons of saving for retirement through your employer.

Few people retire with enough money saved up. The Federation of Unions of South Africa (FEDUSA) paints a grim picture for South Africans looking to retire. According to the report, only one in every three South African adults (including pensioners) has some form of retirement savings. What’s more, according to the 2020 Sanlam Benchmark Survey, 61% of pensioners can’t make ends meet.

There are several reasons for this. Many typically underfund their pension by contributing too little to it. Withdrawals from pension funds after resigning and switching jobs, coupled with the financial strain on households due to COVID-19, has also resulted in pension funds being depleted.

There’s still time

If you don’t think you have enough money to fund your retirement, it’s not the end. There’s always time to do something about it. Usually this means working more (perhaps taking on a side hustle to earn more cash to fund your retirement), upping your monthly pension contributions, or postponing retirement from 55 to 65 or even later if you’re still fit and healthy enough to work.

Considering saving for retirement through your employer? Read on for some lesser-known benefits and facts about workplace retirement plans to make sure you make the right decision to have enough money when you’re ready to kick back and enjoy retirement.

Are you saving enough for retirement? Use this tool to see how you’re tracking.

The pros of a workplace pension

If you haven’t already done so, find out if your employer offers a retirement fund, such as a pension or provident fund. There are various benefits of signing up to your employer’s workplace pension scheme including:

#1: Matching contributions

If your employer has an established retirement fund, it will be a condition of employment to contribute towards the fund when you join the employer. But your employer may even match the contributions you make, too.

#2: Access to risk benefits

“In some cases the retirement fund also provides risk benefits, such as life and disability cover, in the fund or part of a separate scheme,” says Madri Jacobs, investment specialist at Brilliance BlueStar Financial Advisory Services, underwritten by Sanlam.

#3: Tax benefits

“Retirement fund contributions are tax deductible, up to the limits per the Income Tax Act. Investment returns and capital growth are not taxable,” she adds.

#4: Protection from creditors

If you’re in debt, creditors can’t touch your retirement savings even if you file for bankruptcy.

#5: Lower fees

Employers, particularly larger multinationals, are often able to form an agreement with pension fund providers to secure lower management rates. “The investment portfolios will usually have a lower (institutional) investment management fee than those of direct investments that you can do online yourself,” says Jacobs.

#6: Free advice and support

“Some funds also have retirement fund counsellors who can help you understand your fund,” says Jacobs.

Want to know which expenses to cut to reach your retirement income goal? Read this.

The cons of a workplace pension

While there are plenty of benefits of a workplace pension, there are also some limitations to consider, including:

#1: Their complexity

“In some cases the benefit structure might be difficult to understand. For example, some funds use a pensionable salary on which contributions are based. Such a salary is less than the gross annual salary, and as a result, you might not be saving as much as you think you are,” cautions Jacobs.

#2: Inadequate contributions

“The contributions you make could be reduced by the risk benefit premiums (if applicable) and, consequently, you save less for retirement than you think, as only a portion of your contributions actually goes towards saving,” says Jacobs.

#3: The need to top up your funds

Your work pension may not perform adequately to fund your retirement or offer you the type of risk cover that you need for you and your family. You may need to take out a separate retirement policy or insurance. It is therefore important to consult a qualified financial planner to discuss your risk, retirement and investment planning needs,” suggests Jacob.

Feeling unprepared for retirement? Speak to a financial planner, who is best positioned to explore your options and help you make financial decisions to help you retire comfortably. Book a meeting today, here.

#4: Leaving your employer

If you resign or get retrenched, you will be offered the option to access your pension fund or transfer it elsewhere to preserve it. Few have the discipline to reinvest the funds, as it’s often too great a temptation to do something with the cash.

To preserve it you can transfer your funds to your new employer’s retirement scheme, or invest them in a preservation fund. If you dip into your pension pot, though, you will lose even more money.

“The biggest advantage of preserving is that your retirement savings remain intact, and that you do not pay tax on the lump sum withdrawal. If you withdraw a portion or all of your savings when leaving your employer, it is taxable and it will be very difficult to catch up on saving in future what you withdrew in the past,” says Jacobs.

 If you are in doubt about what to do with your pension fund, involve a financial planner to help you so you don’t have to make up any shortfall for your retirement needs. Book a meeting with one today.