You may have heard about benefits you can receive from Government Employees Pension Fund (GEPF) when you retire, but do you know how these are calculated and what they mean in reality?
You will receive a gratuity, and either a guaranteed monthly pension till you die or you can transfer your benefit to an approved fund.
You can also choose to take one-third of your benefit as a lump sum and two-thirds as a pension or transfer to a living annuity.
To understand the numbers, consider the case of Rose, 61, who has been an educator for the past 38 years.
Over the years she has moved up the ranks, from head of department to principal and now advisor at the department of education. She is married to Thomas, a retired Judge.
She recently asked for the benefit statement and would like to understand what her options look like should she decide to retire at the end of this month. Her benefit statement looks like this:
• Resignation benefit: R6 828 552
• Lump sum (gratuity payable): R1 813 306
• Monthly pension payable: R40 914 (before tax)
• Current monthly salary: R52 091 (before tax) (R625 099 a year)
The pre-1998 tax-free benefit
Rose started working for government before 1998. Before 1998, government employees were entitled to take their retirement benefit lump sum tax-free.
Employees who started working before this date retain the right to take a portion of their lump sum tax- free and that portion is calculated in terms of the ratio of years worked before 1998 relative to the total number of years worked for the government.
Rose has worked 20 years since 1998, so the portion that is taxed is:
R6 828 552 × 20 years post 1998 ÷ 38 years of service = R3 593 975.
Therefore, the tax-free benefit is R6 828 552 - R3593 975 = R3 234 577.
Option 1: Retire with the GEPF
If Rose chooses this option it means she chooses to have her pension paid by GEPF after retirement.
As per her benefit statement, she will receive a cash gratuity of R1813306. This will be untaxed because it is below her tax-free portion.
She will receive a monthly gross income of R40 914 until she dies.
She will also receive all her leave days' pay as a lump sum.
The government will continue to subsidise her medical scheme contributions as if she was still employed.
Should she pass away, Thomas will receive half of her monthly income, i.e R40 914 ÷ 2 = R20 457 a month before tax.
Should she pass away within five years of retirement, her beneficiaries will receive a lump sum payout, depending on when she passes away - the maximum amount they will receive is R1 963 872 (R40 914 × 12 × 4) if she passes away in the first year and the amount decreases gradually as the years progress.
Option 2: Leaving GEPF and transferring to an approved fund
If Rose chooses this option it means that she will part ways with the GEPF and take her full resignation benefit and transfer it to an approved annuity fund.
Her full resignation benefit of R6 828 552 will be released by the GEPF and transferred tax-free to an approved retirement fund.
This is when she must decide whether to take up to one-third as a lump sum and use the remaining two-thirds to buy a pension as she retires from the GEPF.
The amount she can take as cash is up to one-third of her benefit, or R2 276 184 (R6 828 552 ÷ 3). Rose will receive this amount tax-free as it is below her pre-1998 tax-free benefit that was calculated above.
She is obliged to use the remaining two-thirds to invest in order to receive regular income.
That is, she can invest R4 552 368 (R6 828 552 × 2 ÷ 3) in a living annuity from which she can draw a monthly income.
Rose can now decide how much monthly income she wants to draw. Whatever she chooses, her annual income must be between 2.5% and 17.5% of the portion she invested. This means she must draw between R9 484 and R66 388 a month before tax, but she needs to withdraw an income that is sustainable for the rest of her life - most likely a lower percentage of around 4% or 5%.
Should she pass away during her retirement, the full remaining balance in her living annuity will be paid to her chosen beneficiaries. It is not easy to decide which is the best option for Rose as there are many factors that should guide her decision.
Rose needs to sit down with a professional financial advisor that will look at her circumstances, for example, her lifestyle, debts, health, dependents and future plans to assist her make an informed decision and create a financial plan specifically designed for her needs.
It should also be clear from the information on Rose's case that you cannot simply take advice or copy the choices made by your neighbour, friend or colleague, as your circumstances differ and professional consultation is always required.