As a financial journalist I often come across misinformation spread by unscrupulous financial advisers when it comes to the Government Employees Pension Fund.
Most of these untruths relate to members’ funds at retirement, as the financial advisers are hoping for the member to rather resign, take their pension money and give it to the financial adviser to manage – at a fee.
One of the common misunderstandings is around what happens to a retiree’s pension income five years after retirement.
Members are told by advisers that their pension income will come to an end five years after retirement. This is completely false and misleading information.
The GEPF is what’s known as a defined benefit fund. This essentially means that benefits are guaranteed for all members. The risk is pooled (as with any insurance product), so members who pass away earlier effectively cross-subsidise those who live longer.
As the GEPF does not pay fees or commissions, members receive a higher income than if the member had to purchase an equivalent annuity with a resignation benefit. Also, the GEPF guarantees an annual pension increase each year at 75% of inflation – this increase could be higher, if investment returns are good.
If you have more than ten years’ service, the GEPF provides a guaranteed income for life – and these days, that could mean many years after retirement. The average GEPF member who retired at age 65 is now living 19 years in retirement – or to the age of 84.
To give an example, if your GEPF pension is R20 000 a month and you live for the average 19 years post-retirement, by the time you die, the GEPF will have paid out R4.5 million in today’s value.
If a member passes away at any time during retirement, the surviving spouse receives a 50% or 75% pension for the rest of their life. If the member had only married after retirement, the new spouse would still be entitled to the spousal pension.
The five-year guarantee period
The misunderstanding relates to the five-year guarantee period. The annuity is guaranteed for 60 months after retirement. This means if the member passes away within the first five years of retirement, the beneficiaries will receive the balance of the monthly GEPF pension payments up to the end of the five-year period, paid as a lump sum.
For example, if the member died 24 months after retirement and was receiving an income of R20 000 per month, the remaining 36 months would be paid as a lump sum of R720 000 (R20 000 multiplied by 36) to your beneficiaries.
In addition, the spouse would continue to receive a monthly spouse’s pension from the first month after the member’s death. However, after five years, no funds are paid to beneficiaries apart from the spousal pension.
The only exception would be if the retiree had a minor child, who would qualify for a child pension until he or she reaches the age of 22.
The only way to leave retirement funds to other beneficiaries, such as adult children, would be to invest the gratuity you receive at retirement.
For example, if you received R500 000 as your lump-sum benefit and invested it for 20 years with an average return of 4% above inflation, it would be worth R1.1 million in today’s value.
This article is part of a member education series in partnership with the GEPF.