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Financial Planning 3A > Retirement Planning > Flashcards

Retirement Planning Flashcards

1
Q

What do financial planners need to know

A

Different retirement vehicles
The taxation of contributions and benefits
The rules around transfer of benefits and membership of funds

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2
Q

Retirement funds are governed primarily by which legislation

A

Pension Funds Act 24 of 1956
Pension Fund (PF) Circulars, FSRA Conduct Standards
Financial Sector Regulation Act (“FSRA”) 9 of 2017
Income Tax Act 58 of 1962

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3
Q

FRSA

A

introduced a Twin Peaks model of financial sector regulation:
Financial Sector Conduct Authority (FSCA) and a Prudential Authority (PA)

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4
Q

Pension fund organisation

A

pension, provident and retirement annuity funds

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5
Q

Types of retirement funds

A

Occupational funds
Non-occupational funds
Beneficiary funds

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6
Q

Characteristics of occupational funds

A

Employer – employee relationship
Adds to sense of job security and stability
Furthers employers objectives
Might provide ancillary benefits (life and disability cover)
Costs are spread in the form of regular contributions
Tax advantages for both employer and employee
types: PENSION AND PROVIDENT FUNDS

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7
Q

Criteria for occupational funds

A

Registration
Employer- employee relationship
Membership is compulsory and condition of employment
Fund must be permanently established for providing benefits to members
Maximum of 1/3 may be taken as lump sum (except where fund value is less than R247 500)

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8
Q

Non-occupational funds (individual funds)

A

funds where there is no employer­-employee relationship such as pension preservation funds, provident preservation funds or retirement annuity funds

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9
Q

Beneficiary funds

A

funds established specifically for purposes of receiving, managing, investing and paying benefits awarded to beneficiaries of deceased retirement fund members.
(death benefit)

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10
Q

Rules around funds

A
  1. Pension Funds must be REGISTERED by the Registrar of Pension Funds and APPROVED by the Commissioner of the SARS
  2. Application must among other include a copy of the rules of the fund
  3. Rules itself sets out the calculation and payment of contributions payable to the fund by the members
  4. The Registrar has power to direct a fund to amend its rules
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11
Q

Criteria for pension fund

A
  1. registered with the FSCA
  2. employer-­employee relationship
  3. must be a permanent fund to provide annuities to
    members and dependants
  4. membership is compulsory for all employees
  5. maximum of one-­third may be taken as a lump sum
  6. maximum of two­-thirds must be used to purchase an annuity
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12
Q

Criteria for provident fund

A
  1. registered with the FSCA;
  2. employer­-employee relationship;
  3. must be a permanent fund to provide annuities to
    members and dependants
  4. membership is compulsory for all employees
  5. member may take the entire benefit in cash
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13
Q

T-day provisions

A

vested rights of provident fund member plus growth thereon, will still be available as cash lump sums upon retirement after 1 March 2021
members of provident funds and who are already 55 years of age on 1 March 2021 will continue to be able to take their full provident fund benefit in cash on retirement, provided they remain in the same provident fund until retirement.

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14
Q

new rules from T Day provisions

A
  1. Member can elect to take the portion of their retirement benefit built up before 1 March 2021 in cash (vested rights).
  2. One-third of the remainder (benefits contributed and accumulated after T-day) can be taken in cash, two-thirds must be used to purchase a annuity
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15
Q

Eligibility for membership

A

Usually only permanent staff and employees appointed on a long­-term contract are eligible, but there may also be distinctions between different classes of employees
hourly-­paid employees: eligible for employer’s provident fund
monthly-­paid employees: eligible for pension fund.
maximum or minimum age restriction for eligibility.

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16
Q

retirement annuity fund

A

means any fund (other than a pension fund, provident fund or benefit fund) which is approved by the Commissioner in respect of the year of assessment in question

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17
Q

Criteria for retirement annuity fund

A
  1. Does not require employer-employee relationship
  2. Must be permanent
  3. 1/3 lump sum, 2/3 annuity
  4. Cannot access any benefits before 55 years
  5. Where retirement benefit less than R247 500 – lump sum available
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18
Q

Preservation funds

A

helps house their WITHDRAWAL benefits from an occupational fund in another type of retirement vehicle when they change jobs, with the option to access those funds prior to retirement
Benefit of tax deferral and preservation of retirement savings
Also allows for unclaimed benefits as well as benefits from divorce
Pension preservation and provident preservation

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19
Q

Transfer occurs as result of

A

RESIGNATION
RETRENCHMENT
DISMISSAL
WINDING UP OF FUND
TRANSFER OF BUSINESS

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20
Q

Criteria for preservation funds

A
  1. At retirement, 1/3 lump sum, 2/3 annuity ( pension preservation)
  2. At retirement , entire lump sum ( provident preservation) BUT subject to changes as with Provident Fund
  3. NO additional contributions allowed
  4. Members allowed once off withdrawal ( divorce awards does not affect the once off withdrawal)
  5. Member not compelled to retire from preservation fund upon retirement
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21
Q

Pension fund (1) VS Pension preservation fund (2) tax-free transfers

A
  1. any pension fund, pension preservation fund or retirement annuity fund;
  2. into any pension fund, pension preservation fund or retirement annuity fund
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22
Q

Provident fund (1) VS Provident preservation fund (2) tax-free transfers

A
  1. into any pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund
  2. into any provident fund, provident preservation fund, or retirement annuity fund
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23
Q

Retirement annuity fund tax-free transfers

A

into any retirement annuity fund

24
Q

Ways to calculate fund benefits

A

Defined contribution (money purchase) method
Defined benefit (final salary) method

25
Q

Defined contribution method

A
  1. Contributions by member and employer is defined as a percentage of salary
  2. As salary increases, contributions also increase
  3. Final benefit = contributions + investment performance
  4. Members bear the risk of poor performances
26
Q

Defined benefit method

A
  1. Final benefit is based on final salary and is calculated by a formula (2% × years of membership × final salary)
  2. Employer contribution is determined by a valuator
  3. Employer bears the risk of poor performance
27
Q

Types of benefits

A

Retirement benefits
Death benefits
Withdrawal benefits
Unclaimed benefits

28
Q

Retirement benefit

A

main objective of a retirement fund
usual for annuities to be purchased from an insurer

29
Q

Death benefits

A

provides benefits to beneficiaries
could also include group life benefits over and above retirement benefits

30
Q

Withdrawal benefits

A

paid prior to retirement or death
usually upon resignation, retrenchment or dismissal
can transfer benefits to preservation fund, retirement annuity or new employers fund

31
Q

Unclaimed benefits (WHY?)

A

ignorance, apathy, non compliant with tax
benefit unclaimed only taxed when transferred or paid out

32
Q

Prudent Investment Guidelines

A
  1. Regulation 28 prescribes certain investment limits on certain categories of assets that can be invested in
  2. Acts as a safety net to protect funds from poor local and global financial market performance
  3. Eg. Listed shares 75%, immovable property 25% and so forth
  4. It applies to pension funds, provident funds, preservation funds and retirement annuity funds
33
Q

Protection on Death - Section 37C

A
  1. Members do NOT have freedom of testation (not part of estate)
  2. Trustees determine beneficiaries who are FINANCIALLY and LEGALLY dependent
  3. Must be done equitably
  4. Persons nominated by member (not dependent) MAY be considered
  5. Why? Dependents must be adequately supported and not burden the state
  6. How? 12 months to determine dependents
34
Q

Section 37(1)(a) dependents

A
  1. legally liable (minor child, parent or grandparent)
  2. not legally liable (cohabitees, spouse, fiancée, posthumous child, an adopted child and a child born out of wedlock)
35
Q

Types of dependents

A
  1. was legally liable
  2. was not legally liable
  3. would have become legally liable had the member not died
36
Q

How are these dependents identified?

A
  1. Beneficiary nominations
  2. Employer records
  3. Engaging family and colleagues
  4. Must do all that is reasonable to identify them
37
Q

What if there are dependents and nominees?

A

Trustees must exercise their discretion as to how the benefits must be apportioned

38
Q

Section 37C highlights 4 situations

A
  1. There are dependents but no nominees (trustees must distribute what they deem to be equitable)
  2. There are nominees but no dependents (trustees must distribute to nominees as indicated in the nomination form) . Except if liabilities exceed assets in estate of deceased
  3. There are dependents and nominees (trustees must exercise their discretion equitably)
  4. There are no dependents or nominees (paid to the estate)
39
Q

What should trustees consider when distributing benefits

A
  1. Age of beneficiaries
  2. Wishes of member
  3. Beneficiaries’ relationship with member
  4. Future earning capacity of beneficiaries
  5. Financial status of beneficiaries
  6. The amount available for distribution
  7. Benefits may also be paid into a trust or beneficiary fund
40
Q

Divorce benefit

A

If benefits awarded in terms of divorce order, retirement fund must endorse its records to reflect same

41
Q

When will benefits typically accrue to a member?

A

retirement
death
resignation

42
Q

Swemmer Case

A

court ordered Retirement Annuities property of ex-wife
member husband turned 55, Mrs Swemmer demanded transfer of policies
court held that the accrual of the funds determined by the rules of the fund and Mrs S did not become owner of the policy, cannot lay claim to accrued benefits after date of divorce and does not replace the member husband as member of the fund
effect of ruling? Mrs S had to wait until husband retired and the divorce order could not be enforced against the fund. Could be seen as unfair

43
Q

clean break principle

A
  1. Act dictates that payment must be made to non-member immediately
  2. Non-member can elect to transfer payment to an approved fund or to be paid in cash
  3. Fund must accede to request within 60 days of being informed of non-member election (interest thereafter)
  4. THIS ONLY APPLIED TO DIVORCES AFTER 13 SEPTEMBER 2007
44
Q

Financial Services Laws General Amendment Act 22 of 2008

A
  1. All interests awarded prior to 13 September 2007, deemed to accrue on that date – effectively applying clean break
  2. 45 days of receiving divorce order, fund requests how proceeds to be paid
  3. Ex notifies fund within 120 days whether paid in cash or transferred to a fund
  4. Fund to give effect to election within 60 days
  5. If fail to make election within 120 days, fund to pay cash within 30 days thereafter
45
Q

Taxation Laws Amendment Act 22 of 2012

A
  1. Divorce orders after 13 September 2007, non-member is taxed
  2. Pre 13 September 2007 divorces – silent. Effect is not taxed in hands of non- member spouse
  3. NB! Ex can elect to transfer benefit tax free to another approved fund
46
Q

Tax benefits of retirement benefits

A
  1. Contributions are tax deductible up to a certain maximum
  2. Retirement funds are not estate dutiable and not subject to capital gains tax
  3. Lump sum payable upon retirement and death is tax free up to certain limits – currently R550 000
47
Q

Post-retirement planning

A

1.Member must use at least 2/3 of capital to purchase an annuity
2. Annuity could be conventional ( life) or living annuity
3. Why? To provide an income in retirement!
4. the annuity itself is taxable

48
Q

CONVENTIONAL (LIFE) ANNUITY

A
  1. Pays guaranteed amount until death of the annuitant
  2. Can be taken on single or joint lives (usually husband and wife)
  3. If joint – annuity ceases on death of second dying
  4. Can be structured to pay same amount or be reduced on the death of first dying
  5. Choice around increases every year – can be level or escalating every year
  6. Can also have guarantee period which dictates that annuity will pay despite annuitants death
49
Q

LIVING ANNUITY

A
  1. Annuitant has option of drawing income of between 2.5% and 17.5% of value of fund
  2. Amount can be reviewed on an annual basis
  3. A beneficiary can be nominated to receive benefits on the death
  4. Beneficiary can elect to take benefits in the form of lump sum or an annuity or both
  5. annuitant may elect a different draw-down percentage only on the anniversary date of the policy
50
Q

Advantages of Living annuities

A
  1. By keeping withdrawal rate as low as possible initially, allows the units to increase substantially for future years
  2. Value of the units not lost upon death – able to bequeath to beneficiaries
  3. The product itself is transparent and performances, costs and fees are easily determinable
  4. Ability to switch underlying funds
  5. Tax effective – fund itself not subject to income tax
51
Q

Retirement gap

A

Capital available - capital required

Capital Available > Capital Required = Surplus
Capital Available < Capital Required = Shortfall

52
Q

Capital required

A

Amount needed at retirement to sustain the desired lifestyle of the individual up until death.

53
Q

Capital Available

A

Amount available to individual at retirement from provisions
made such as pension fund.

54
Q

Resultant rate

A

Time value of money calculations that involve annual cash flows that increase (escalate) and earn interest at the same time

55
Q

Retirement planning process

A

PRE retirement planning: 20 - 54 yrs
AT retirement planning: 55 - 65 yrs
POST retirement planning: 66 - 85 yrs

Financial Planning 3A (8 decks)

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