Many members of the GEPF are being given bad advice by financial advisers, who are telling them that they should resign from the GEPF before retirement.
Members of the Government Employees Pension Fund (GEPF) are being approached by financial advisers and being advised to consider resigning before retirement.
They recommend that the member should resign from the GEPF before retirement and transfer the resignation benefit, tax free, to an approved preservation pension fund.
The member then retires from the preservation fund, usually taking one-third of the fund as a withdrawal and uses two-thirds to purchase a living annuity.
The argument is that by doing this, a member can leave their children a legacy as, unlike a guaranteed annuity paid by the GEPF, the capital in a living annuity can be left to your family.
But this is bad advice.
The rules of the GEPF provide that the first five years of the annuity are guaranteed, which means if the member passes away within the five years, the beneficiaries will receive the balance of the annuity payments up to the end of the five-year period, as a lump sum.
However, after five years only the spouse will receive a spousal pension, unless there are children younger than 22 years old.
While it may appear attractive to use a living annuity to provide an inheritance, it is important to fully understand the consequences of this decision, and why this is such bad advice:
- A living annuity cannot guarantee your income for life. As a living annuity invests in an investment portfolio, the income will be determined by market returns. Poor market performance can result in a drop in income compared to the guaranteed income offered by the GEPF.
- There are significant costs related to living annuities which could reduce your retirement benefit. An upfront advice fee of up to 1.5% may be charged by the adviser over and above the product fees. The adviser can also charge an annual fee of 1% – again over and above the product fees. This creates a perverse incentive for financial advisers to recommend living annuities. On a capital amount of R1 million, an adviser can earn up to R15 000 upfront plus R10 000 a year for every R1 million of value. When combined with the product fee it is not unusual to see living annuities costing as much as 2% a year – or R20 000 per R1 million invested. As the GEPF does not pay retail prices for annuities, it is able to provide better value than if the member had to purchase an annuity with a resignation benefit.
- In order not to run out of money, it is only advised to draw down 5% of your capital from a living annuity. The adviser should provide a full comparison between your GEPF pension income and a 5% withdrawal rate from your living annuity – net of costs. You will probably find that you receive a better income from the GEPF due to the cost savings.
- If you decide to opt for a higher withdrawal rate, the adviser must show you a graph to indicate at what age you will run out of money. According to the Association of Savings and Investments South Africa, if you withdraw 10% a year, your income will start to reduce by the fifth year.
- You will lose your GEPF benefits which include a spousal pension and funeral benefits.
- You will lose your state medical subsidy if applicable.
If your dream is to leave your children a legacy, then you could invest the gratuity. 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. You do not have to opt for an expensive living annuity to provide your children with a legacy.
Taking the cash
Some members plan on resigning before retirement to access the full cash value of their retirement fund.
This is a terrible idea. Not only do you lose the benefits of the GEPF, but you pay a significant amount of tax.
For example, a member who resigns with a cash benefit of R3 million could pay R832 500 in tax. They would still need to invest the money in order to generate an income, but now their income would have significantly reduced due to the lower capital value.
This article is part of a member education series in partnership with the GEPF.
In the article above reference is only made to living annuities as the alternative. There are other options as well, including combination of products. Having said that, a living annuity may just as well be a good option, depending on the individual’s personal profile, risk appetite, return objectives, income requirement, dependants, beneficiaries, estate and tax, just to name a few. Financial advisers do an analysis to present the client (member) with options. Over and above this, the member can also be informed of how much he/she will be losing by retiring early. The client (member) can then make an informed decision, understanding all the matters at hand. Once a member retires, the’s no turnning back. Make sure you select an option that suits you. The best advice for one, may well be the worst for another.
Thank you for you comment. This article specifically referred to a practice by certain advisers to sell living annuities to GEPF members which is why there is no reference to other retirement options. I did write an article recently on the benefit of a guaranteed annuity which is very attractive at the moment given the high interest rates. https://mayaonmoney.co.za/2022/11/a-guaranteed-annuity-can-offer-real-value/
Someone has told me to resign and my 4million is giving me 14% return on my investment and I live off my returns was this good advices
Did you pay tax on the lump sum? What product was it invested into? The return sounds high which does make me worry about its risk
Hi
Just wanted to know if the GEPF is paying you to make these videos on their behalf?
Yes, this is part of an member education series I am doing for the GEPF – but the editorial content is my own.
Hi Maya,i will take early retirement in April 2022,am now 57and work for government in health department,could you please put me in contact with someone from GEPF to work out my penalties and what my monthly salary would be after penalties
Your HR department should be able to assist but there is a calculator on the GEPF website. There is also the self-service app.
https://www.gepf.gov.za/benefits-calculator/
I don’t know if you touched this topic
Re: Personal cover –
Greenlight Death Benefit
I am 67. Paid this policy for over 20 years. Currently standing at Rm
Premium increases every year. Now it is at a stage I can no longer afford it. Currently seating at R3k a month.
If I cancel I loose everything. All the payments done for over 20 years 😭😭😭
This is an excellent point. It is the issue with many “whole life” policies, especially those that are age-rated – in other words the premium increases with your age risk. I would suggest you speak to Old Mutual and see if they can adjust the cover to be more affordable. Another option is for your beneficiaries to take over the payments.
Advisers they are taking advantage of the situation now as it was proposed that government employees can excess a certain % on the of which the majority were happy because they saw it as a way of relief but it was later dismissed
Which didn’t go well with the majority. Thanks for the advice very informative.
thank you for the feedback