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Let the KLF team help you with useful information about the pension and provident funds, and how to select the right one for you.
Advantages and Disadvantages Lump Sum Payments
There are advantages and disadvantages to getting all your benefits in a lump sum. One disadvantage is that you may spend a lump sum very quickly. Then there will be nothing left as pension for the rest of your life. Then you will have to apply for a state pension. But if you invest the lump sum wisely you should not have this problem.
An advantage of getting a lump sum payment is that you avoid all the problems in getting a private pension every month. Insurance companies and other pension funds will pay a private pension into a bank account if you have one, or send a cheque to your home address, or to your old employer who will then pass on the payment. If you have no bank account or live in a place where the postal system is very unreliable, you might have great difficulty receiving and cashing your pension cheque every month. A lump sum will help to avoid all these problems.
For workers who are not well paid, the amount of a monthly pension may be so small that it gives them no security anyway. People also sometimes feel suspicious about leaving their money with pension fund companies after they retire. They would rather have the money to look after themselves. A person who gets a lump sum may be able to put this towards buying a house or plot of land, while a person retiring to a rural area may use it to buy cows, goats, and so on.
The provident fund is usually more flexible than the pension fund. Part of the lump sum can be used to buy a private pension through a private pension company. The main advantage of a pension fund is that it is paid for life. The pension will be paid out until you die. This offers you security because a certain amount of money will be coming in every month. If you are not disciplined to deal with a large sum of money, then it is better to get the money paid out in small amounts every month.
Pension funds offer better tax benefits to the worker. A worker’s contributions to a pension fund are deductible for tax, while contributions to a provident fund are not. No tax is payable on a lump sum of R30 000 or less (at March 1998) paid out by a provident fund. Trade unions usually demand provident funds for their members. They feel that many pension funds are very old and have rules which don’t take into account the interests of workers. Most provident funds were established more recently and have rules which suit the interests of workers. But pension funds can have rules that are as good as any provident fund.
The strongest argument in favour of provident funds and the lump sum payment concerns the means test used to work out whether a person qualifies for a state old-age pension. Usually if a person receives a private pension, that person is disqualified from receiving a state old-age pension. If a person gets a lump sum payment then that person can also qualify for a state pension in some cases.
The Difference between a Pension Fund and a Provident Fund
The main difference is that if a pension fund member retires, the member gets one third of the total benefit in a cash lump sum and the other two-thirds is paid out in the form of a pension over the rest of the member’s life. A provident fund member can get the full benefit paid in a cash lump sum.
How does a Pension or Provident fund work?
Money goes into a fund through contributions from employers and employees (sometimes only employers contribute to the fund). These funds gain interest when the insurance companies invest them. Money goes out of the fund to pay for benefits and also for the expenses of running the fund. The money in the fund belongs to the fund and not to the people who contribute.
Pension and provident funds exist for the benefit of their members, who are workers and pensioners. Usually it is compulsory to become a member of a fund. This means that a worker does not choose whether to belong to the fund or not, the worker must belong to the fund if the employer has a fund. A worker cannot get money back from a fund except as benefits according to the fund rules.
Types of Benefits
Normally a fund has these kinds of benefits:
- Withdrawal benefits: Paid to workers who resign or are dismissed
- Retrenchment benefits: Paid to workers who are retrenched
- Retirement benefits: Paid to workers when they retire
- Insured benefits: Including benefits paid to a worker who is disabled and benefits paid to the dependents of a worker who dies.
Not all funds provide all these benefits. To understand how any fund works, the member must read the rules of the fund.
Withdrawal Benefits
Withdrawal benefits are paid to workers who leave work either through dismissal or resignation before they are due to retire. Usually, if a worker resigns and withdraws from a pension fund, only the worker’s own contributions to the fund are paid out, plus very small interest on those contributions. The worker might not get the employer’s contribution to the fund. Usually, provident funds pay out better withdrawal benefits than pension funds. But the rules of pension funds can be changed to improve withdrawal benefits.
Retirement Benefits
The benefit on retirement depends on how long the worker was a member of a fund, and the final wages of the worker before retirement. Usually the age of retirement for men is 65 years and for women it is 60 years. Different funds have different ways of calculating retirement benefits. The rules of each fund set this out.
Retrenchment Benefits
Not all funds allow retrenchment benefits.
If there is a retrenchment benefit scheme, then usually the worker will get his or her own contributions and the employer’s contributions as well as full interest.
Insured Benefits
insured benefits mean that benefits are paid to the member or the member’s widow and dependents if the member becomes disabled and cannot work any longer, or if the member dies while still employed.
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