HOW YOUR BENEFIT IS CALCULATED
If you exit the fund because you leave your company, you can be paid out a cash benefit from your retirement fund. You might expect a certain amount to be paid out and be either pleasantly surprised or somewhat disappointed. The expectation you have is based on how you perceive your benefit to be calculated. This note will explain how your benefit is calculated and provide you with a way to estimate what payout you can receive when you leave the fund.
HOW YOUR CONTRIBUTIONS ARE ADDED UP
Each month, you will see an amount taken off your salary for retirement savings let's use the example of R100. You can't simply calculate your benefit by saying that you worked for 24 months and contributed R100 a month, so you should get paid R2400 when you leave the fund. The entire R100 does not necessarily get applied towards your benefit costs have to be deducted first.
FEES THAT ARE DEDUCTED
The first cost deducted from the contribution will be for administration fees. Every administrator charges an amount per member to run the fund. Let's say that the admin fee is R1. So now, the maximum possible amount going towards your benefit would be R100 minus R1.
But, admin fees are not the only costs deducted from the contribution. If your retirement package includes any benefits insured by an insurance company, a premium for these benefits will to be paid for out of your contribution. These benefits could include:
● Death cover (a multiple of your salary that your family would receive if you died while on the fund)
● Funeral cover
● Disability Income Benefit (a monthly payment you would receive if you were disabled and unable to work)
● Cover for Dread Disease
So, if each benefit costs R1, and you are covered for all four benefits, then R4 would be deducted. So, your contribution towards your benefit would actually be R100 minus R1 minus R4. Therefore, R95 will be applied towards your retirement (or to the amount you could receive if you left the company).
The R95 is invested in various ways, including in the stock market, in order to earn interest. But, this investment is not like a savings account where you get a fixed positive return each month the return on the investment will fluctuate each month and may even be negative sometimes. So, on a monthly basis you may lose a bit, but if you are investing for a long period of time, the overall returns should be positive and higher than a savings account.
Whenever you leave the fund and get a cash benefit, you have to pay tax on that benefit. SARS has specific tables and methods of calculating tax on each type of withdrawal. While these tables and calculations are fixed for everyone, the rand value of the tax deducted from the benefit will be different for each person.
FINAL BENEFIT CALCULATION
So, if you calculate your benefit, it would be the contribution, less any costs, plus or minus investment return, less tax. Or to use our example:
R100 R1 R4 +/- investment return tax = benefit payout in cash
By using this basic calculation you will be able to calculate an approximate of your benefit and, thereby, avoid disappointment when the actual benefit is paid out. Tip: Rather overestimate for the costs and tax and underestimate the investment return that way you will be pleasantly surprised!
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