SHOULD YOU RESIGN OR RETIRE FROM THE GEPF?

This topic has become quite the heated debate in our offices. The essence of our turmoil lies mainly in the fact that there are so many factors to consider and so many different formulas within the Government Employees Pension Fund (hereafter referred to as the “GEPF”). We will try to touch on most of them in this article so that you can make up your own mind on which option would suit you better. Just bear in mind that we have tried to keep the comparison short and simple, so there might be attributes particular to your situation that are not mentioned here. We would advise that you speak to your financial advisor before making your final decision.

1) Retiring from the GEPF:

Let’s take a look at the pros and cons of retiring from the GEPF and earning a pension calculated on the rules set out by the GEPF.

As you know, your pension at retirement is calculated on a formula set out by the GEPF. This formula uses inputs of your amount of years worked as a government employee and your final salary (or average thereof). This means that your gratuity (lump sum benefit), as well as your monthly income, increases exponentially as your “years worked” increases. The only problem with this fact is that your income is fixed. There is no room for increasing or decreasing or having ANY say for that matter. But let’s put the pros and cons on a list to enhance perspective:

PRO’s:
a) You are guaranteed your income for the rest of your life:
This is quite important, as you do not have to worry about any investment risk, advice risk, market fluctuations, etc. It also gives stability, because you know exactly how much income you are going to receive every month. Your spouse (if he/she outlives you) also gets a benefit for their remaining life that is some percentage (50% or 75%) of the income that you received.

b) You keep your subsidies and benefits:
When retiring from the GEPF, you get to keep some (or all) of your subsidies and benefits. Benefits include medical aid, house subsidy, etc. Some of them might fall away, but it depends on the specific area of work and the benefits you had before retiring. This is an area many forget to address when doing their retirement planning, so be careful to take this into consideration.

CON’s:
a) No risk means no flexibility:
Because you are effectively “buying” your pension and you are getting that pension for the rest of your life, you do not have access to any of the capital when you die. Irrespective of how long you live after retiring, you do not get the invested capital back. (There is a provision that pays out a “gratuity” if you die within the first 5 years, but only a certain percentage gets paid back.) This means that you can not use your retirement savings to do planning for future generations.

b) You do not have flexibility in income or investment choices:
As with the previous point, because of the risk residing with the GEPF, you do not have a say in what your income should be. Your income gets calculated using a formula and it can not be changed. You do have an option of choosing “high income” or “low income”, but there is no flexibility other than that. You also have no say in the increases in the pension amount.

2) Resigning from the GEPF:

When you resign from the GEPF, you effectively lose all benefits of the fund. You then receive an actuarial amount as your retirement savings that must be invested into an approved retirement fund. The actuarial amount is calculated by using a formula as defined by the GEPF.

You, as a member, have the following options on withdrawal from the GEPF:
(i) Cash resignation from the fund,  or
(ii) Transfer to an approved retirement fund

A cash withdrawal is usually not a good idea as the amount of tax paid on the actuarial amount is quite substantial. For the purposes of comparison, we will focus on the situation where you transfer your benefit to an approved retirement fund and then retire out of that fund to a living annuity.

Once you resign, you will lose all previous benefits. This must be taken into consideration when calculating the income to be taken from the living annuity. It is also not a smooth process of getting the capital transferred, as a considerable amount of paperwork needs to be done and processed. Let’s now take a look at some pros and cons related to resigning from the GEPF:

PRO’s
a) Total flexibility with your investment:
With a living annuity investment structure, you have the freedom to choose your own pension income. You have, by law, a choice between withdrawing anything between 2,5% and 17,5% of your retirement savings per annum. Although it would not be a good idea to withdraw more than 5%, you still have an option to change your income on an annual basis.

b) The capital invested remains your own:
With a living annuity, when you die, the capital that is left in the fund is paid to your estate or beneficiaries. This makes it possible to plan more than one generation ahead and use the proceeds from your pension investment to cover all estate duty or executors fees.

c) Investment Freedom:
Within a living annuity, you have the freedom to invest into the funds of your choice. The only restrictions are those set on you by the investment company themselves. This means that you can plan more effectively for your retirement and thereafter. You could also use assets with greater growth possibilities than those used by the GEPF.

CON’s:
a) You have to bear the investment risk:
Basically, you can only withdraw that which you actually have. You have a capital sum of money that you are withdrawing from. If that amount is depleted, you don’t get any income. You, therefore, bear the investment risk yourself and your income is not guaranteed as with the option with the GEPF. This is a major negative, as many individuals do not understand the consequences of their actions. Market fluctuations play a major role in your investment and can be a great asset or your worst enemy.

b) You lose all benefits you had with the GEPF:
This includes medical aid, housing subsidies, etc.

To conclude, a one-size-fits-all approach to this decision is not going to be very accurate as there are too many variables to consider. We would recommend speaking to your financial advisor before making any decisions.  For more information or a personal financial analysis, feel free to contact us!

Happy investing!