31/10/2024
GEPF still a good option for retirement
For all South Africans, retirement is a big step and requires important choices to be made to ensure that retirement takes place with financial peace of mind and a lifelong income.
Retirement decisions are different for each individual and should be made with caution, taking into account all facts and realities. Financial decisions directly before retirement or resignation are therefore very important and is it essential that a complete financial analysis forms the basis thereof before the decisions are made and implemented.
The Government Employees Pension Fund (GEPF) is regularly placed under the magnifying glass. In June, Maroela Media reported on a poll of 2,000 members of the GEPF, which indicated that only 17% thought that their contributions were safe. A total of 53% of the respondents were also of the opinion that the GEPF management is not acting in the interest of their members and 46% were of the opinion that they are not acting in the interest of the country either.
However, I am of the opinion that it is still wise to retire within the GEPF-fund.
It is important to note that the GEPF is a defined benefit fund, which means that a person's fund value and benefits are calculated using only a mathematical formula. The fund value and benefits in the event of death, disability, resignation and retirement are therefore calculated by the following two factors- namely their years of service (continuously contributed without a break-in-service) and final salary (calculated by taking the average salary in the last 24 months of service).
Remember that contributions from employees and employers have no bearing on your pension fund values, nor have the economy, political affairs and market fluctuations both locally and internationally. This means that you fund value can never decrease. The covid-19 pandemic is a good example of where pension fund values only continued to grow, as the member gained more service years.
Other important facts to keep in mind when retiring from the GEPF are:
1. Members can only retire after the age of 55, but the more service years you have the higher your future pension-income will be.
2. Members with a continuous service record of ten years and more have the option to retire within the GEPF. The more years of service a person has, the closer his/her monthly pension income will be to his/her last monthly salary and the better his/her financial future.
3. If a member has more than 15 years of service, the member also retains his/her medical aid and medical aid subsidy. A proper medical aid is an enormous expense that must always be considered when retirement decisions are made.
Your GEPF pension consists of two parts. The first part consists of about a third and represents the lump sum amount that may be withdrawn at retirement and of which the first R550 000 is in theory not taxable. The other two-thirds represents the monthly income from the GEPF and is also referred to as your annuity income. This income, after retirement, is a lifelong monthly income that is taxed before the income is paid out to the member.
I’m of the opinion that if a person was used to a monthly income or salary, it will only make sense that such a person should make a financial choice at retirement that still includes a monthly income, especially if it is guaranteed. The percentage of income offered by the GEPF is very high and it will be difficult to generate such an income from a private investment without exhausting your capital.
Withdrawing your full pension fund value for the purpose of starting a business at retirement or to help and support children and/or dependents should not be a consideration. Such a decision would always be risky and unwise.
If a person chooses to retire within the fund, their full lump sum will be paid out to him/her after tax has been deducted in full. It is wise to invest the larger part of this lump sum amount. Keep in mind that you can no longer rely on your annual birthday bonus and would it therefore be wise to invest your lumps sum amount in such a way that financial needs can be met when needed in future.
When making these investment decisions, it is important to make an informed decision and invest the funds correctly to avoid tax problems and to keep the money out of a future estate as far as possible. It is therefore of paramount importance that you need to obtain expert and reliable investment advice from a registered and regulated financial advisor, before making any financial decisions.
Finally, when we look at maximum income and benefits, I believe that if a person has more than ten years of continuous service, it will be a sensible decision to retire within the GEPF fund and receive a monthly income.
The GEPF provides a lifelong income and there are many GEPF-pensioners who have been receiving their income punctually every month for many years.
Written by: Johan Venter
