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Article provided by Paralegal Advice
The main aim of a pension or provident fund is to provide benefits for its members when they retire from employment. The fund also usually pays benefits when a member dies while still working, or is unable to work because of illness, or is retrenched.
The difference between a pension fund and a provident fund
The main difference is that if a pension fund member retires, the member gets one third of the total benefit in a cash lump sum and the other two-thirds is paid out in the form of a pension over the rest of the member's life. A provident fund member can get the full benefit paid in a cash lump sum.
There are advantages and disadvantages to getting all your benefits in a lump sum. One disadvantage is that you may spend a lump sum very quickly. Then there will be nothing left as pension for the rest of your life . Then you will have to apply for a state pension. But if you invest the lump sum wisely you should not have this problem.
An advantage of getting a lump sum payment is that you avoid all the problems in getting a private pension every month. Insurance companies and other pension funds will pay a private pension into a bank account if you have one, or else send a cheque to your home address, or to your old employer who will then pass on the payment. But if you have no bank account or live in a place where the postal system is very unreliable, you might have great difficulty receiving and cashing your pension cheque every month. A lump sum will help to avoid all these problems.
For workers who are not well paid, the amount of a monthly pension may be so small that it gives them no security anyway. People also sometimes feel suspicious about leaving their money with pension fund companies after they retire. They would rather have the money to look after themselves. A person who gets a lump sum may be able to put this towards buying a house or plot of land, while a person retiring to a rural area may use it to buy cows, goats, and so on.
The provident fund is usually more flexible than the pension fund. Part of the lump sum can be used to buy a private pension through a private pension company. The main advantage of a pension fund is that it is paid for life. The pension will be paid out until you die. This offers you security because a certain amount of money will be coming in every month. If you are not disciplined to deal with a large sum of money, then it is better to get the money paid out in small amounts every month.
Pension funds offer better tax benefits to the worker. A worker's contributions to a pension fund are deductible for tax, while contributions to a provident fund are not. No tax is payable on a lump sum of R30 000 or less (at March 1998) paid out by a provident fund.Trade unions usually demand provident funds for their members. They feel that many pension funds are very old and have rules which don't take into account the interests of workers. Most provident funds were established more recently and have rules which suit the interests of workers. But pension funds can have rules that are as good as any provident fund.
The strongest argument in favour of provident funds and the lump sum payment concerns the means test used to work out whether a person qualifies for a state old-age pension. Usually if a person receives a private pension, that person is disqualified from receiving a state old-age pension. If a person gets a lump sum payment then that person can also qualify for a state pension in some cases.
The state old-age pension, the means test and private pension or provident funds
From June 1998 the state old age pension is R490 per month. If you already receive other income which is less than R490 per month, you will get a smaller state pension to make your income up to R490. If you own a house, this will not affect your state pension. But if you get a lump sum payout from a retirement or provident fund and buy a house with that, it could affect the amount of state pension you get.
How does a pension or provident fund work?
Money goes into a fund through contributions from employers and employees (sometimes only employers contribute to the fund). These funds gain interest when the insurance company's invest them. Money goes out of the fund to pay for benefits and also for the expenses of running the fund. The money in the fund belongs to the fund and not to the people who contribute.
But pension and provident funds exist for the benefit of their members, who are workers and pensioners. Usually it is compulsory to become a member of a fund. This means that a worker does not choose whether to belong to the fund or not, the worker must belong to the fund if the employer has a fund. A worker cannot get money back from a fund except as benefits according to the fund rules.
Types of benefits
Normally a fund has these kinds of benefits:
- withdrawal benefits, paid to workers who resign or are dismissed
- retrenchment benefits, paid to workers who are retrenched
- retirement benefits, paid to workers when they retire
- insured benefits, including benefits paid to a worker who is disabled and benefits paid to the dependants of a worker who dies.
Not all funds provide all these benefits. To understand how any fund works, the member must read the rules of the fund.
Withdrawal benefits
Withdrawal benefits are paid to workers who leave work either through dismissal or resignation before they are due to retire. Usually, if a worker resigns and withdraws from a pension fund, only the worker's own contributions to the fund are paid out, plus very small interest on those contributions. The worker might not get the employer's contribution to the fund. Usually, provident funds pay out better withdrawal benefits than pension funds. But the rules of pension funds can be changed to improve withdrawal benefits.
Retrenchment benefits
Not all funds allow retrenchment benefits. If there is a retrenchment benefit scheme, then usually the worker will get his or her own contributions, AND the employer's contributions as well as full interest.
Retirement benefits
The benefit on retirement depends on how long the worker was a member of a fund, and the final wages of the worker before retirement . Usually the age of retirement for men is 65 years and for women it is 60 years. Different funds have different ways of calculating retirement benefits. The rules of each fund set this out.
Insured benefits
Insured benefits mean that benefits are paid to the member or the member's widow and dependants if the member becomes disabled and so cannot carry on working, or if the member dies while still employed.
Bargaining Council funds
A pension or provident fund may be established by a Bargaining Council Agreement. The Bargaining Council Agreement will lay down the rules for the pension or provident fund. Usually all workers who fall under a Bargaining Council Agreement have to become members of any fund set up by that Bargaining Council, unless their employer has de-registered from the fund and set up their own fund.
Bargaining Council funds do not allow a worker to withdraw benefits if he or she leaves one company to go and work for another company in the same industry. Usually a worker can only withdraw benefits after a year of leaving the company, if he or she is still unemployed or was re-employed outside the industry. If the worker is re-employed in the same industry before one year is up, then contributions carry on as if there was no change in job.
Complaints about payments from pension funds
Any person who has a complaint about money that they think a pension fund owes them, for example death benefits or retirement benefits, can make a complaint to the Pension Funds Adjudicator.
Pension Funds Adjudicator
The law says you must first send your complaint in writing to the pension fund or to the employer. The pension fund or employer then has 30 days to reply to the complaint. If they don't reply, or if you are not satisfied with the reply, then you can send your complaint to the Pension Funds Adjudicator. Include your letter to the pension fund or employer, and their reply. There is no charge to make a complaint with the Pension Funds Adjudicator.
After you have made a complaint to the Pension Funds Adjudicator, the Adjudicator gives the pension fund 30 days to reply. Once the Adjudicator has received the pension fund's reply, they will look at the facts and decide who is right. The Pension Funds Adjudicator does not deal with government pension funds. If a person who works for the government has got a complaint about a government pension then they must send their complaint to the Public Protector.
Who can make a complaint to the Pension Funds Adjudicator?
The following people can make a complaint to the Pension Funds Adjudicator:
- a member or former member of a pension fund
- a beneficiary of a fund or a former beneficiary of a fund
(a beneficiary is someone who is written down in your pension fund agreement to get the money from your pension fund, for example your family if you die)
- an employer who participates in a workplace fund
- a board or board member of a fund
- any person with an interest in a complaint
Time limits
You must get your complaint to the Pension Funds Adjudicator within 3 years of the problem arising. There is a long waiting list of complaints that need to be dealt with by the Pension Funds Adjudicator. A person who sends in a complaint will usually have to wait about 15 months for the case to be solved. It doesn't help to telephone the Pension Funds Adjudicator office - they will contact people who have made complaints once they have dealt with the case.
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