The principles are the same, but the employer retirement funds tend to have more formal processes. In this article we detail the employer processes first and then discuss the practical differences as they relate to retirement annuities and preservation funds.
The first step is for the employer retirement fund to notify members of when they are scheduled to retire. This needs to be done at least six months before their retirement date. Retirement dates are usually at the end of the month in which they reach their retirement age. Some employers arrange for employees to retire at the end of December, in their retirement year, regardless of the month in which their birthday takes place. Employers often make arrangements for individuals to stay and finish project commitments, but then usually as a contractor.
Retirement notifications have a number of elements, set out below:
- They inform members of their retirement date;
- They ask members for additional information in order to facilitate easier payment. Bank account details and FICA documents are required, as well as ID documents and marriage certificates;
- They inform members of the anticipated value of their pension or provident fund at that date;
- They usually warn the retiree of the delay that will occur between completing the forms and actually receiving the first pension payment; so that members can arrange interim income, if needed;
- They explain the options that members have as far as cash withdrawals are concerned;
- They explain that the individual members need to make their own annuity choices (pension) and submit the proposal form to the retirement fund, once they have settled on a choice. Signing this form gives both the fund and the annuity supplier the authority to start moving the fund money into the annuity when the due date arrives. Retiring members are free to invest in pensions from any supplier who is appropriately registered with the Financial Sector Conduct Authority;
- They explain how tax is potentially charged on any cash withdrawals;
- They explain any details of post-retirement medical aid options – whether they should remain members of the employer’s medical aid or whether they must find a new one.
- They must also offer members the opportunity to have retirement benefits counselling, which the fund must provide. Please note that this is not access to a financial advisor;
- They must inform members that they can put off retirement until a later date, while leaving their money in the old retirement fund;
- Members must also be informed that the trustees have chosen an annuity for them to consider for retirement, if they find it difficult to make the choice themselves;
- They should also recommend that members make use of the services of a financial advisor (Financial Services Provider), who is registered in terms of the Financial Advisory and Intermediary Services (FAIS) Act.
- Start to investigate their position to understand exactly how much retirement capital they have. Interestingly enough, most people don’t have a really detailed plan;
- Complete the personal details as required by the fund;
- Explore the annuity products that are available, and learn exactly how they work and which one is suitable for them. Some points to check:
- How are annual increases calculated and granted?
- Is your spouse included? In other words, if you die before your spouse, what pension will they receive?
- Check any detail that they are uncomfortable with by asking their advisor questions, the compliance officer at the institution concerned, or getting a second opinion from a different advisor. Members should be warned to NEVER SIGN THE PROPOSAL UNTIL THEY ARE COMPLETELY SATISFIED.
- Complete the proposal from the institution supplying the annuity WITHOUT LEAVING A SINGLE BLANK SPACE. Pension and annuity administrators cannot proceed with transfers if the forms are incomplete. If there are empty spaces, the forms will be sent back to the members repeatedly until they are complete and can be acted upon. Because life annuity quotations are only valid for seven days at a time, any carelessness in completing forms can delay the process and may result in a new quote being required.
- If that is necessary, and the new quote is lower, there may be material damage to a member’s retirement expectations.
Retirement annuities and preservation funds are exempted from some of these conditions, so members need to be careful with them as well.
- If a member decides to postpone going on pension even though they do retire, they may just leave the money where it is for a few more years;
- These funds have no requirement to provide retirement benefits counselling when members retire, nor do they need to have a trustee selected. There’s an annuity choice available for those who find making a decision difficult.
- Otherwise, many financial institutions write to members approaching retirement age, offering specific annuities. No matter how tempting these are, there is seldom enough information to make a decision. In many cases it is because a spouse is not included. What might look like a very substantial pension, could be reduced when a spouse is added to the fund. Additionally, members are usually not fully informed as to how annual pensions are granted. Also, if company A - with whom you have a retirement annuity or a preservation fund - offers you annuities, they will only be from that particular company.
It is very necessary for members to make sure that they give both postal and residential addresses, as well as email addresses, when completing forms for their pension. Administrators making life annuity payments will need pensioners to prove that they are still alive by completing a certificate of existence every year. This means that these administrators need to be notified of every address change a member makes, in order for them to be able to send members correspondence. If the address is wrong, the letter asking for the certificate of existence cannot be sent to the pensioner who, in turn, cannot respond. This often results in pensions being stopped because the administrators make the automatic assumption that the member has passed away. The fund is therefore closed after three months of no communication. When this happens, and the member eventually comes forward, the whole identification and FICA process must be redone.
D.L Crawford CFP®
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