Employer RAs - a great choice for entrepreneurs

Taking care of your employees is one of the best ways to retain good staff and boost productivity; and helping them save for retirement is a good place to start. But for many smaller companies providing a pension or provident fund is costly and the administration and compliance requirements are onerous. Then there is the expense of having to make contributions to the fund.

Unit-trust based group retirement annuities (RAs) circumvent these problems while offering a flexible, tax-efficient, hassle-free way to save for retirement. They offer your staff the benefits of an individually owned RA, administered on a group basis, that caters for their individual needs and enables them to monitor and manage their own investment.

RAs essentially defer tax until your employees retire. Their contributions are tax deductible to the greater of R3500 or 15% of their pre-tax income. Investment growth is then generated off this pre-tax base and this growth is also tax free.

When your employee eventually retires from the RA, he or she can withdraw a lump-sum benefit of one-third of the capital. This is taxed favourably: the first R300 000 of total pension withdrawals (including RA withdrawals) is tax free, the next R300 000 is taxed at 18%, and the following R300 000 at 27%. Above R900 000 the tax rate is 36%, which is still below the maximum 40% marginal rate for individuals.

The remaining two-thirds of their RA capital must be used to purchase a pension-providing vehicle such as a living annuity or a guaranteed life annuity. The tax rates used for payments from this annuity are based on the member’s marginal tax rate after retirement, which may be lower than when they are working.

Gone are the days of life-long employment – today’s workforce is highly mobile. Because each RA under the group scheme is individually owned, your employees can continue contributing after they’ve left your company. Or they can stop contributing without any penalties. This is where unit trust-based RAs differ from conventional, policy-based products offered by life insurance houses.

What they can’t do is cash in their fund before age 55, unless the value of their savings is under R7000 or they are emigrating. In this way, Employer RAs are in line with government’s thinking on retirement savings preservation. A big issue for government is the loss of retirement savings when individuals change jobs and take their accumulated pension monies in cash instead of transferring them to preservation funds.

With unit-trust based RAs, your employees’ RA money is invested in a range of unit trusts that they select for themselves. At Allan Gray, for example, they can invest in Allan Gray’s own unit trusts plus a range of top-performing unit trusts from other asset managers.

“Unit trusts remain one of the best savings vehicles for retirement over the longer term,” says Jeanette Marais, director of retail and client services at Allan Gray.

“Using unit trusts as the underlying investment gives the Employer RA a simple, transparent, low cost product structure that’s easy to monitor. At the same time, investors have the flexibility of switching their investment between different unit trusts if they want to.”

In order to set up an Allan Gray Employer RA scheme, you need a minimum of five employees that can afford to contribute a minimum of R500 per month, unless the average contribution exceeds R1000 in which case there is flexibility to reduce the minimum contribution to R250 per month for certain employees.