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Basic Principles Of Business Financial Planning > Topic 6 Employee And Retirement Benefits > Flashcards

Topic 6 Employee And Retirement Benefits Flashcards

1
Q

Employee benefit arrangement

A

A benefit provided to an employee by an employer, in addition to normal salary or wages

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2
Q

Employee benefits include

A
  1. Retirement fund arrangement, e.g., pension or provident fund
  2. Insurance, e.g., group life cover, disability and accident benefits
  3. Medical scheme arrangement, e.g., Medical aid and gap cover
  4. Fringe benefits in the form of a non-cash payment, e.g., use of a company car
  5. Fringe benefits in the form of a monetary allowance, e.g., a travel allowance
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3
Q

Aim of employee benefits

A

To increase the financial security of employees, especially in the case of retirement, death, or the disablement of the employee

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4
Q

Advantages of employee benefits

A
  1. Attracts and retains quality employees
  2. Satisfies the moral obligation of employers towards their employees in an ordered and controllable manner
  3. It is much easier to plan the cash flow of the business by paying regular premiums than having to assist families with matters such as funeral arrangements on an ad-hoc basis
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5
Q

Types of retirement FUNDS (6)

A
  1. Pension funds
  2. Pension preservation funds
  3. Provident funds
  4. Provident preservation funds
  5. Retirement annuity funds
  6. Beneficiary funds
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6
Q

Retirement fund reform in South Africa purpose

A

These reforms are for the harmonization of retirement fund legislation to ensure that the same rules apply to all retirement funds

To encourage and enable increased savings for retirement

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7
Q

Pension funds 1

A

Designed to provide the retired member with a pension income during retirement, also known as an annuity

Maximum of 1/3 of the retirement benefit may be taken as a lumpsum, and a portion of such a lump sum may be tax-free

Balance of the benefit needs to be used to purchase a compulsory income to provide a retirement income to the member, which will be fully taxable

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8
Q

Pension funds 2

A

The full value of the pension fund benefit is R247 500 or less, it may be taken as a taxable cash lump sum

Members of pension funds receive a tax deduction on their own and their employer’s contributions to the fund, up to a certain limit

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9
Q

Provident funds 1

A

They provide for savings to be made towards retirement

Many funds allowed the member to buy an annuity, if preferred, but most members opted for a cash lump sum payout

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10
Q

Provident funds 2

A

Members receive a tax deduction on their own and their employer’s contributions to the fund, up to a certain limit

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11
Q

Provident fund changes as of 1 March 2021 (retirement reform)

A

New members will be obliged to take a maximum of 1/3 of their fund benefit at retirement in the form of a cash lump sum (instead of the full benefit previously)

Other 2/3 had to be used to but a compulsory annuity that provides an income for the rest of their retirement years

If full value is R247 500 or less, it may be taken as a taxable cash lump sum

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12
Q

Existing members YOUNGER than 55 on 21 March 2021

A

At retirement, they may take the fund benefits accumulated up to T-day plus the return on these benefits after T-day as a taxable cash lump sum

After T-day plus investment returns, it will have to be taken in the form of up yo 1/3 as a cash lump sum, and an annuity has to be purchased with the other 2/3

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13
Q

Existing members OLDER than 55 on 21 March 2021

A

Members will not be subjest to annuitisation on benefits that accumulated before and after T-day, and will be allowed to take their full benefits as a taxable cash lump sum, on condition that their post T-day contributions continue to be made to the same provident fund

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14
Q

Preservation funds

A

Were created by law to allow these former members to transfer their fund benefits to a preservation fund, where the investment is ‘preserved’ until retirement

Not allowed to make ongoing contributions to these preservation funds

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15
Q

Provident preservation fund changes as of 1 March 2021

A

Subject to the same annuitisation rules that apply to provident funds

Preservation funds are not offered to employees by employers

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16
Q

Retirement annuity funds

A

Developed to afford an opportunity to people who work for themselves to save towards retirement

Make additional provision for retirement, as the employer fund arrangements rarely provide sufficient benefits for fund members to retire comfortably

Not a employee benefit

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17
Q

Difference between pension and provident funds

A

It doesn’t matter whether an employer implements a pens8on fund or a provident fund, as they operate in the same way and offer the same benefit.

There is no longer a different basis for tax deductions on members’ contributions to the 2 types of funds

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18
Q

Defined benefit fund

A

Provides a retirement benefit to its members that is determined by a formula

2% × years of membership × final salary

Employer bears the risk of rising costs and poor fund performance in a defined benefit funds

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19
Q

Defined contribution pension funds

A

Employers and employees each contribute a set percentage of the member’s salary to the retirement fund

EMPLOYEE contributes 5% of salary; EMPLOYER contributes 7% of salary

Member’s retirement benefit = sum of employers contributions + employees contributions + investment earnings - costs

Risk of poor investment earnings lies with the employee

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20
Q

Types of retirement BENEFITS (4)

A

Retirement benefits
Death benefits
Disability benefits
Withdrawal benefits

21
Q

Retirement benefits

A

The benefit that a member can receive at retirement can take the form of a cash lump sum, some form of annuity, or a combination of the two

22
Q

Annuity

A

A regular income/pension that the member receives in return for funds invested from the pension or provident fund

23
Q

Compulsory annuity

A

When a member is obliged to buy an annuity with at least 2/3 of the retirement benefit

Annuity income is fully taxable

Conventional annuities and living annuities

24
Q

Conventional (guaranteed or life) annuities characteristics

A
  1. Pay income until the death of the annuitant, regardless ot age
  2. If annuitant dies shortly after purchase, the capital is lost to beneficiaries
  3. Annuitant can never vary the terms of the annuity
  4. Income is guaranteed, no investment risk
  5. Income is offered to annuitant depends on prevailing interest rate
25
Q

Living annuities characteristics

A
  1. Pay income to annuitant, as long as there is capital left.
  2. If annuitant dies at any time after purchasing, their beneficiaries will receive the remaining value of the fund
  3. Can select a drawdown percentage of between 2.5% and 17.5% of the fund value p.a, and cam elect to change it every year
  4. Income is not guaranteed but depends on the return achieved by the investments
  5. Income drawdown safely can be greater than in a guaranteed annuity because it depends on market returns
26
Q

Death benefit

A

The accumulated fund value at the time of the member’s death.

Accumulated fund value plus group life benefit

27
Q

Approved group life benefits

A

The life policy is owned by the retirement fund itself

Fund pays the premiums in respect of the policy

On death, the life cover amount pays to the fund and then paid to the dependants or beneficiaries the same way as the accumulated fund value

28
Q

Tax implications on approved group life benefits

A

Any portion of the death benefit paid in the form of a lump sum to dependants will be subject to retirement fund lump sum taxation

The fund will obtain a tax directive from SARS and will pay tax liability to SARS and the after-tax amount to the dependants

Any portion of the death benefit paid in the form of an annuity will be subject to income tax in the hands of the recipient

29
Q

Unapproved group life benefits

A

The life policy is owned by the employer, who also pays the premiums

On death, only pays the accumulated fund value to the dependants

Fund value (provided by fund) and group life benefit (provided by employer via life policy)

30
Q

Tax implications on unapproved group life benefits

A

Because they pay out directly to the dependants, it will be subject only to the normal estate duty taxation

31
Q

Dependant

A

A person in respect of whom the member is legally liable for maintenance (children, ex-spouse)

A person in respect of whom the member is NOT legally liable for maintenance (elderly parent, spouse, child, fiancé)

32
Q

Nominated beneficiaries

A

Member may nominate a person who is not a dependant, but whom they would like to receive a portion of the death benefit

Trustees are not obligated to make a distribution to a nominee, but the member’s wishes are taken into consideration

33
Q

Factors to consider when making an equitable distribution of death benefits

A
  1. Amount available
  2. Extent of dependency, including current and future maintenance needs
  3. Age of the beneficiary
  4. Current income and qualifications
  5. Benefits beneficiaries received from other sources
  6. Future earning potential of each beneficiary
  7. Relationship to the deceased
  8. Wishes of the deceased
34
Q

Manner of payment

A
  1. Paid in cash directly to beneficiary
  2. Paid to a guardian or caregiver of the beneficiary
  3. Paid to a trust fund set up for a minor child or disabled dependant
  4. Paid to a beneficiary fund, especially set up for this purpose
  5. Paid from the fund in installments
35
Q

Disability benefits

A

Usually offered through a separate insurance arrangement

Rules must specify the action to be taken in the even of a member becoming disabled

36
Q

Rules of disability benefits

A
  1. A clause on ill-health early retirement in a defined benefit pension fund arrangement
  2. No additional provision is made within the fund or in a separate arrangement in a defined contribution arrangement
37
Q

Withdrawal benefits rules

A
  1. Take part or all of the benefit in cash (subject to tax)
  2. Transfer part or all of the benefit to the new employer’s fund, if applicable (recommended)
  3. Transfer part or all to a retirement annuity or preservation fund (recommended)
  4. Leave the full benefit in the current fund as part of the default preservation option
38
Q

Implications of divorce on retirement benefits

A

The court may award a portion of the member’s current retirement benefit to an ex-spouse

Ex-spouse pays tax on the benefit that they receive if they take it as cash

39
Q

Pension interest

A

The amount of benefit that the member would have become entitled to, had they resigned from a pension or provident fund on the date of divorce.

For retirement annuities, it’s the sum of net contributions and the simple annual interest

40
Q

Clean-break principle

A

The ex-spouse (non-member spouse) can withdraw the funds awarded to them in a divorce court order

41
Q

Regulatory environment

A

Retirement funds are legal entities

Retirement funds must be registered with the Registrar of Pension Funds (Financial Sector Conduct Authority) and be approved by the Commissioner for Inland Revenue (for tax purposes) and rhe South African Constitution

42
Q

Fund governance

A

Ways in which an entity is managed and controlled

If a fund is not well governed, it could compromise or even destroy an employee’s entire retirement savings

43
Q

Roleplayers in a fund 1

A
  1. Employer: sets up and chooses the benefit structure
  2. Members: might make contributions depending on rules (employees)
  3. Board of management (trustees): at least 4 board members. Members elect 50% of the board
  4. Chairman: runs trustee meetings
  5. Administrator: responsible for all operational responsibilities
44
Q

Roleplayers in the fund 2

A
  1. Principal officer: responsible for high-level management of fund
  2. Valuator (evaluate financial position) and auditor (assess financial records) unless exempt
  3. Insurer: insurance company
  4. Investment manager: invests and manages investments
  5. Consultant and specialist experts
45
Q

Retirement fund investments

A

Contributions are invested on behalf of fund members, with the main purpose of providing adequate retirement benefits

46
Q

Investment risk

A

The possibility that an investment may fluctuate in value

Low risk usually pays low, steady returns to investors, resulting in lower retirement savings for younger members

High-risk investments may lead to the value falling over time rather than positive returns, resulting in older members not being able to make up the losses on time

47
Q

Regulation 28 (Prudential Investment Guidelines)

A

Applicable to pension, provident and preservation funds, as well as retirement annuity funds

Sets limits of certain single assets and investments held in certain asset classes

Objective is to limit the risk fog holding too many assets in a certain class or single asset

48
Q

Other investment considerations

A

The choice of investment manager(s)

PF Circular 130 also obligates boards of trustees to monitor and review all aspects of the fund, including the investments, on a regular basis

Basic Principles Of Business Financial Planning (6 decks)

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