Should you contribute more to your pension or rather have a separate RA?
As with most questions in the financial sector, this answer may differ between people of different ages, current contribution levels etc thus we will keep this as a general guideline.
Companies introduce retirement funding for the purpose of attempting to reward their staff with some form of security in their retirement years. It may be purely funded by employer only or there may be some combination of contributions between employer and employee.
Part of this contribution may go towards life cover, disability etc but the majority of the funds is intended for the retirement portion of the member.
Where this good intention often goes wrong is when a member resigns from his/her employment and is faced with the option of withdrawing or preserving the money for retirement. Financial pressures and lack of understanding often leads to the decision to withdraw the accumulated funds even though this may be heavily taxed. The consequences are far reaching though and besides the taxation, loss of compounding etc, it brings in a reality of little/no provision for retirement. There is a perception that people have plenty time to simply make up this withdrawal in the working years ahead and everything will still be okay. It is usually in fact the opposite and this becomes a slippery slope towards potential poverty during retirement.
A retirement annuity (RA) often creates an answer to this problem in that the money is locked away until the member is 55 years of age or at retirement and even after this, there is only 1/3 allowed to be withdrawn as a lump sum after which the other 2/3 has to be used to purchase some form of annuity from which they will derive a monthly income. The drawback of this investment strategy is that liquidity (pre-retirement) is removed, especially in difficult times, however funding put into an RA should not be seen as something that can be accessed in difficult times and therefore, provided the contributions were within budget in the beginning, these funds should be forgotten about until called upon after retirement. Depending on salary bracket, the tax deductions from this also offer a huge investment benefit.
So what is the best option here? Yes you can contribute additional funding to your current pension fund and costs might be slightly lower but flexibility in terms of investment can be greatly hindered and retirement security compromised through easy access to withdraw. A combination of these retirement vehicles therefore often provides the best balance.
While the above relates to general scenarios, it is best to seek the advice of an advisor in order to assess your personal situation and help you make the right decisions.
Adriaan Giessing CFA
Head of Distribution