Get to know the costs and risks of pension choices

You must understand the implications of decisions you make about your retirement savings.
You must understand the implications of decisions you make about your retirement savings.
Image: 123RF

Be careful when deciding on how to use your retirement savings to provide a pension, as the decision you make may be one you are stuck with for life.

A retired Harmony Gold Mining Company employee found this out the hard way when his pension proved to be too low to meet his daily needs.

The Sentinel Retirement Fund told "Mr Z" that it could not meet his request to increase his pension of just over R2 350 a month. He then asked the Pension Funds Adjudicator to help him withdraw his lump sum or transfer his benefit to another fund.

The adjudicator, Muvhango Lukhaimane, wasn't able to help Mr Z as she found that the fund had acted within its rules and he had agreed to the pension.

Lukhaimane's ruling on Mr Z's complaint shows how important it is that you understand the implications of decisions you make about your retirement savings, especially:

The consequences of withdrawing a lump sum at retirement and spending it on anything other than providing for a pension;

Taking a pension guaranteed for life gives you security about your income in retirement, but if you want to guarantee the pension for a period regardless of whether you live that long, the cost to you will be a lower pension; and

Taking a relatively high pension for your spouse will also reduce your benefit.

Lukhaimane says in her ruling that, once implemented, proposed regulations under the Pension Funds Act will oblige funds to provide counselling to all members about their retirement benefits from March next year.

She says once this happens, funds will have to explain the benefits in clear and understandable language so that members like Mr Z understand the costs and the risks of their pension choices. According to Lukhaimane's ruling, Mr Z retired after 16 years of contributing to the fund with savings of just over R960 000.

He chose to withdraw one third, just over R320 000, as a lump sum, as pension fund members are entitled to do so.

This decision left only R630 000 for the fund to use to provide a pension for Mr Z. The Sentinel Retirement Fund pays pensions from within the fund, and its rules do not provide for retiring members to buy a pension for any other provider.

However, funds typically give members some choices. Mr Z chose to take a pension that would pay out, without any reduction in the pension, to his wife should she outlive him.

It is a good idea to provide for a spouse who does not have his or her own income, but this will cost more than a pension that does not provide for a spouse.

This is because typically, the surviving spouse is a woman and women typically live longer than men and retirement funds and other pension providers have to factor this in when they calculate your pension.

You should therefore consider your spouse's income needs. You can choose a lower pension - 50% or 75% of the initial pension - as your spouse may be able to live on less after you pass on.

Mr Z also chose to have the pension guaranteed for 15 years, so that in the event of his death before the 15 years were up, the pension would continue to be paid to his heirs. Had he chosen no guarantee period, or even a 10-year-period instead, his pension would have been higher.

Once Mr Z signed the fund's claim form agreeing to his benefits being structured as they were, his decision was final and irrevocable, Lukhaimane said.

As such, she could not assist Mr Z and dismissed his complaint.

Savings affect your pension

Many pensioners complain that their pensions are too low. If you are contributing to a pension fund, your savings in the fund determine your pension. Contributing too little is often the biggest reason for a low pension.

When Mr Z asked for an increase in his pension, the Sentinel Retirement Fund told the Pension Funds Adjudicator that its rules provide that the board may grant pension increases from time to time in line with its pension increase policy. This policy is based on the inflation rate and investment returns earned by the savings in the funds.

The funds actuary advise the trustees of the fund what increases the fund can afford to pay and still have enough to pay pensions to all members for the rest of their lives.

Increases are not based on the demands of pensioners.

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