Two retirement fund options

[ledoman]

Hi everyone,

I am starting a new job and have two options for joining a retirement scheme through my employer. Do any of you perhaps have any experience with or advice to offer on which one of these two would be the best in the long run.

1. Employers Provident Fund – Administrated by Alexander Forbs

• Employer contributes 10% of pensionable salary + risk and administration costs (2.277% in 2023).
• Employee contributes: 7.5% or 10% of pensionable salary.
• Employee will NOT be able to change the contribution percentage, once a choice is made.
• On resignation, dismal or retrenchment, or retirement all contributions, transfers plus interest payable.
• Ill health retirement (disability): Lump sum (2x annual pensionable salary) and Pension (2% final salary x each year of service until age 65)
• Death: Lump sum (2x annual pensionable salary) and Spouse / Child Pension (1% final salary x each year of service until age 65)

1. Funds at Work: Umbrella Fund administrated by Momentum

• Employer contributes 10% of pensionable salary (inclusive of risk benefit premiums, administrative costs and consulting fees).
• Employee contributes: 2.5%, 5%, 7.5% or 10% of pensionable salary.
• Employee will be able to change the contribution percentage annually in March.
• On resignation, dismal or retrenchment, or retirement full fund credit payable.
• Disability income benefit: Monthly income equal 75% of pensionable salary, payable until recovery, retirement or death. Benefit is tax free.
• Death: 3x annual salary plus full fund credit.
• Housing Loan Security: 40% of fund credit could be utilized towards a security for a housing loan.

Any idea of how to make sense of the two will be much appreciated.

 

[exoregonsoldier]

@ledoman Both options are effectively fine, it comes down to a few things:

Option 1: Risk cover included lump sum death and disability.

Option 2: Risk cover includes Income Protection

Option 2 is generally better, especially if you have a long career ahead of you as the Income Protection payout will be a lot higher than the disability payout, and the claims definition is wider and more flexible.

However, you could always do this in your own capacity.

However again, if you have health issues getting on a group scheme instead of a private scheme is very advantageous as they will usually not underwrite you specifically.

Other major point is that option 1 doesnt allow you to amend your contribution. If circumstances change it can be useful to reduce your pension (for example to assist in buying a home) or to increase it (once you have paid off some short term debt for example.)

Flexibility is very useful in financial planning but it is the opposite side of the structure. It can also be good to put yourself on a 'forced saving' via your pension, especially if you know that you are a poor decision maker around money.

The investment portion will probably be quite equal. Both funds are very good and your employer is paying 10% no matter what so no real advantage either way there. You could get technical about fees etc but would need time and information. Both these funds have a good name in the industry.

If I was forced to a decision based on the information provided I would lean towards option 2 as it provides flexibility of contribution and Income Protection.

 

[ledoman]

@exoregonsoldier Hi. Thank you very much for your detailed reply. I was also leaning towards option 2. Think I was a bit worried about the fund being managed by Momentum and many comments on this platform seem to suggest staying clear of companies that sell insurance. But then again my previous pension was at Sanlam so suppose it's just a different side of the same coin.

 

[exoregonsoldier]

@ledoman https://www.moneyweb.co.za/moneyweb...ension-as-security-for-a-property-based-loan/

Article on the pension backed homeloan. Could also be quite useful.(option 2).

Some insurers sell steuctured products like RAs and endowments with onerous terms. These products turn out to be terrible investments with high fees. That's why people say not to invest with them. For pension funds the insurers are generally fine. Momentum is also the best of a bad bunch.

 

[lovedaisies]

@ledoman Being able to change your contribution (as offered by Momentum) is powerful, but you could also just start your own RA on the side to achieve the same result. I've heard of some horror stories with company pensions held at Alexander Forbes. I'm not sure to what extent this was a problem with Alexander Forbes or with the actual company though.

With the information given, I would be inclined to go with the Momentum option, with minimum employee contribution (2.5%) and start my own RA under my control for the difference. You will only be able to claim the tax back at the end of the year, but that then gives you an annual lump sum to either:

1. dump in your RA to get another tax refund the next year; or
2. invest in some other way;