The Government Employees Pension Fund (GEPF) is a defined benefit fund. This means the pension received by a member has nothing to do with the investment performance of the fund. A member’s pension payout is determined according to the GEPF formula.
GEPF members receive a once-off gratuity and a recurring annuity income, with the amounts based on their final salary and years of service. The member’s final salary is calculated by taking the average salary in the last 24 months of service.
GEPF pays the annuity income for the lifetime of the member and guarantees an annual increase of 75% of inflation, although it could be higher.
GEPF pensions automatically include a 50% spousal pension if the member is married when they pass away. This means the spouse would continue to receive 50% of the pension. The member has an option at retirement to increase this to 75%.
The GEPF pension is guaranteed for 60 months. This means that if the member were to pass away within five years of retiring, the full remaining income from inception is paid to the beneficiaries, until the 60 months have passed.
The GEPF formula
The once-off gratuity and the amount of the annual annuity income is calculated according to the following formula:
- Gratuity = 6.72% x final salary x years of pensionable service
- Annual annuity = (1/55 x final salary x years of pensionable service) + R360
The following scenarios highlight the importance of not resigning and not cashing in your pension, because the GEPF formula places significant value on the number of years of service.
Scenario one: Final salary R400 000 with 35 years of service
- Gratuity = 6.72% x R400 000 x 35 years = R940 800
- Annual annuity = 1/55 x R400 000 x 35 years + R360 = R255 000 per annum (R21 250 per month)
This is an income replacement ratio of around 65%. In other words, the retiree would receive an income equal to around 65% of their final monthly salary. For the first five years, the annual annuity is guaranteed to be paid out in full, even if the member passes away. This means that the pension will pay out at least R1.27 million in income (excluding inflation increases).
In comparison, a retiree would need to have R4.1 million in fund value to receive the same gratuity/lump sum and income from a with-profit annuity issued by a life insurance company. This is based on a 60-year-old with a spousal pension of 50% and a ten-year guarantee period.
Scenario two: Final salary R400 000 with 20 years of service
- Gratuity = 6.72% x R400 000 x 20 years = R537 600
- Annual annuity = 1/55 x R400 000 x 20 years + R360 = R145 800 per annum (R12 150 per month)
This is an income replacement ratio of around 36%. The retiree would receive an income equal to around 36% of their final monthly salary.
In comparison a retiree would need R2.34 million in fund value to receive the same gratuity/lump sum and income from a life insurance company. This is based on a 60-year-old with a spousal pension of 50%.
This article first appeared in City Press.