Saving private RAs

Many employers insist that new employees join the company's RA scheme. Saving the client's existing private RA under these circumstances Is a perplexing dilemma.

So, your client gets on the phone and says, 'I've just applied for a new job, but they tell me that I've got to join their RA scheme. But I'm already paying towards the RA that you advised me to take out last year. What should I do ?'

Once you have pushed the immediate commission reversal thought from your mind, what are the implications you have to take into account when advising a client whose prospective employer insists on him joining the company RA scheme ? Assuming we are dealing with an insured RA, employment contract issues, affordability and potential 'Statement of Intent' charges should be considered.

Contractual issues

If the client has already signed an employment contract stipulating that joining the employer's RA scheme is a condition of employment, your only option is damage control, since your client has no option but to join.

If the client is still considering the new job and hasn't signed anything, the client must decide whether to accept the employment contract as is or to negotiate with the employer to rule out the offending clause. If that's not acceptable to the employer, then perhaps the client could negotiate a lower rate of contribution than that specified in the employment contract.

Presumably the employer would be making a contribution towards the RA, so if the contract can be altered to exclude membership of the company RA, the client's salary would be adjusted upward with the equivalent cash amount.

Affordability

If the employment contract is already in force, the advisor should investigate the possibility that the combination of the existing RA and the employer provided RA might actually be affordable and within the 15% tax limit. If not, the existing RA might only need a small adjustment. Of course, if the new contractual RA is for 15% of non retirement funding income, you have run out of options.

Statement of Intent charges

Unfortunately, the client may well be exposed to early termination charges if the existing RA is altered by contribution cessation or downward adjustment, through no fault of their own, apart from job seeking. There really is no way around this, but it does provide a valid reason on which to base the aforementioned negotiations to change the employment contract.

And if it is a provident fund ?

What if the employment contract requires membership of a provident fund instead of a RA ?

Trying to negotiate out of provident fund membership is impossible. In addition to the provisions of the employment contract, the Income Tax Act stipulates that in order for members of a provident fund to enjoy the tax breaks, it has to be a condition of employment for all eligible employees to join, provided they fall within the eligibility conditions of the provident fund rules.

Thus, the employer cannot change the contract, since doing so would risks jeopardising the tax approval of the whole fund and all the members would suffer. The employer also risks personal liability for all benefits to be provided by the provident fund, following the precedent set in the Art Medical Pension Fund Adjudicator case, where the employer (and trustee) had to pay an uninsured death benefit from his own pocket.

Previously, membership could be avoided by appointing temporary staff or applying a limited waiting period. However, today, even temporary staff have the right to join funds.

In this scenario, your only option is the affordability argument, but even this will be hampered by the fact that RA contributions are now 15% of a very much lower proportion of non retirement funding income.