THE USE OF ADDITIONAL VOLUNTARY CONTRIBUTIONS OR OTHER
PRODUCTS TO BOOST YOUR RETIREMENT INCOME
ue to the advancement in medicine, today the average person is expected to live
longer than in the previous century. On the other hand, one’s productive (working) period is usually limited to one’s employable years. In Namibia the average retirement age is around 60, although an average person can live for many more years after retirement. Since such a person will no longer be earning an income from formal employment during retirement, it is important to save enough money during working life to maintain one’s standard of living and to provide for life after retirement.
a good option if you wish to boost your retirement benefits or to minimize a potential shortfall in your benefits at retirement. For example, contributing an extra 1% of your salary per month could buy you more than three times extra in retirement. One
of the main advantages of AVCs is that they are a
flexible method of saving for retirement. Subject to
the rules of the fund, you can choose to increase,
decrease, or stop your additional contributions. You can also make once-off lump sum AVCs if you so choose.
Options at retirement
Just like normal pension contributions, you have a number of options at retirement regarding how to utilise your accumulated AVCs. Depending on
individual circumstances, and the type of fund
Tax implications
In Namibia AVCs are not tax deductible. In terms of the Income Tax Act (Act no. 24 of 1981), for a contribution to a pension fund or provident fund by a person holding an office or employment to be deducted in the determination of taxable income, the making of such a contribution must have been a condition of the holding of such office or employment.
Since “additional voluntary contributions” cannot be said to be a condition of the holding of an office or employment, these voluntary contributions can consequently not be deducted in the determination of taxable income as outlined in section 17(1)(n)
(i) of the Act. Therefore, before making AVCs it is important to consult a financial planner to advise you on the option that will best suit your individual
are subject to the rules of the fund. You can either leave your savings with your old fund, where benefits will be deferred until you reach retirement
age, or you can transfer your pension money to the retirement fund of your new employer. Another vehicle that caters for this need is a preservation
fund. This is a retirement fund designed specifically to invest the retirement benefits of employees who
resign, are retrenched, or whose retirement funds
are terminated.
Reduce your lump sum withdrawal
The Income Tax Act allows pension fund members to take up to a maximum of 1/3rd of their benefits in cash (lump sum) at retirement, while in terms of the same Act a provident fund member can get the full benefit in a cash lump sum. It is therefore
In Namibia, a common benefit of employment is a pension scheme to which both the employer and the employee contribute. However, the retirement benefits (savings) accumulated by members through these compulsory pension schemes are not always sufficient to meet the members’ needs or to maintain their lifestyles after they retire.
One way of measuring whether your current retirement savings will be adequate to provide for retirement is by using the Net Replacement Ratio (NRR). This ratio calculates your pension as a percentage of the salary you were receiving before retirement. For example, if your net salary just
If the results of the abovementioned OECD report are anything to go by, it is evident that the majority
of people are not saving nearly enough to provide for a comfortable life after retirement. This article therefore presents various options to consider in order to minimise any shortfall (or potential shortfall) in retirement benefits, and to achieve the optimum net replacement ratio.
Boosting retirement income
Research has shown that saving for retirement as early as possible is the most important decision to ensure adequate retirement income. This is mainly
1. Make additional voluntary contributions
In Namibia the majority of pension fund members belong to occupational pension funds, to which both the employer and the employee contribute in terms of the rules of the fund. As a result, mandatory contribution rates are usually prescribed in the funds’ rules, which are decided by the employer together with the labour unions (representing employees). However, most funds’ rules also make provision for members to make additional voluntary contributions (AVCs) . These are extra contributions made by members of group pension
invested in, i.e. Pension or Provident, you may
choose to;
• Receive a lump sum subject to the provisions of the Income Tax Act;
• Purchase an annuity from a registered insurer of your choice, or
• Transfer all or part of the benefit to another approved retirement fund, preservation fund or retirement annuity fund.
How do I make AVCs?
Normally AVCs would be deducted from your monthly salary by your employer and paid into
circumstances.
2. Other Options
Other options that are available for enhancing retirement benefits are listed below.
Retirement Annuities
Retirement Annuities (RA) are usually offered by life assurance companies. They are based on the same principles as pension funds. A member makes contributions, regular and/or lump-sum, in his personal capacity to his retirement annuity. No withdrawals are allowed until you are at least 55 years of age. At retirement (at least 55 years), you
important to note that the less you take out as a
lump sum at retirement, the more you will be able to spend on buying yourself an annuity that will pay you an income (pension) for life.
Author: Saltiel Shino
SOURCES
Mwinga, Martin Understanding Personal
Finance & Investments in Namibia
OECD (2013), Pensions at a Glance
before you retire is N$10 000 per month, and you expect to receive N $9 000 per month as a pension in retirement, your NRR is estimated to be 90%.
Although there is still no conclusive evidence as to the most appropriate target net replacement ratio, it is generally accepted that a NRR of at least 70%
“For example, contributing an extra 1% of your salary per month could buy you more than three times extra in retirement.”
your retirement savings account, along with your normal pension contributions. So, your first step would be to find out if your fund permits AVCs. If it does, consult your payroll officer to determine the scope for increasing your contribution levels through AVCs.
can take a maximum of 1/3rd of your investment in cash, and the balance will be utilised to purchase an annuity, which will pay you a pension for life. Should you be interested in investing in an RA, it is recommended you speak to a financial advisor or registered broker. Most life assurance companies
2013: OECD and G20 Indicators, OECD
Publishing.
http://dx.doi.org/10.1787/pension_glance-2013-en
will be adequate for an average person to sustain the same lifestyle in retirement. According to a report (“Pensions at Glance 2013”) by the Organization for Economic Cooperation (OECD), the average Net Replacement Ratio (NRR) for South Africa in 2013 was 11%. The Namibian NRR is expected to closely mirror that of South Africa due to the strong historical and economic ties between the two countries.
due to the compounding effect. In layman’s terms, compounding is the ability of an asset to earn interest on interest. However, in a scenario where a pension fund member starts saving for retirement at a late stage of life, various options are available for boosting retirement income, in order to achieve the optimal net replacement ratio. These options are explored below, with particular emphasis placed on the use of additional voluntary contributions.
schemes over and above the normal contribution prescribed in the rules of the fund, in order to increase members’ benefits when they retire. If you belong to a retirement fund that allows you to make AVCs, consider increasing your contributions as much as you can.
Why should you make AVCs
Making additional voluntary contributions can be
During this time of year most companies offer
yearly bonuses to their employees. If you are fortunate enough to be receiving a bonus this year, it is advisable that you consider investing a portion of your bonus instead of spending it all on holiday expenses. Making additional voluntary contributions to your retirement savings account is one of the options you may consider.
offer this service free of charge.
Preserve your savings
It has been established that non-preservation of retirement benefits is one of the biggest factors leading to inadequate retirement savings, especially in South Africa and Namibia. Therefore, it is absolutely vital to preserve your savings when you change jobs instead of deciding to receive your pension in cash. Usually your preservation options