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If you are nearing retirement and are a member of the Government Employee Pension Fund (GEPF), you might feel like a deer in the headlights, unsure of which way to turn with a date (retirement) speeding towards you. If you have spoken to the GEPF for advice, they have a hard sell for you to stay in the fund (because, they want your money). While if you have asked a financial planner/advisor they have had a hard sell to have you leave the fund (because they want to manage your funds and earn from it). It is very difficult to know who to trust and who has your best interests in mind. My aim is to demystify the decision so that you can enter retirement after your many years of hard work knowing that you have done the best thing for you.
Deciding whether to retire or resign from the GEPF can significantly impact your financial future. Each option has its own set of advantages and disadvantages, and the best choice depends on your personal circumstances and financial goals. Here, we explore the key pros and cons of both retiring and resigning from the GEPF.
Resignation from the GEPF
Resignation refers to voluntarily leaving your employment before reaching the official retirement age. When you resign from a position covered by the GEPF, you are entitled to withdraw your pension benefits. These benefits can be taken as a lump sum or transferred to another approved retirement fund. However, by resigning, you forfeit the guaranteed monthly pension and other retirement benefits provided by the GEPF, such as the medical aid subsidy. Should you have pre 1998 contributions you will have an additional tax free cash portion to withdraw.
Retirement within the GEPF
Retirement occurs when you leave your employment upon reaching the official retirement age, or under certain conditions such as early retirement due to ill health or other approved reasons. When you retire from the GEPF, you receive a monthly pension for life, which provides a stable income. Additionally, you may receive a lump sum gratuity if you have more than 10 years of service. Retiring members also often continue to receive a subsidy for their medical aid contributions. Once again if you have pre 1998 contributions you will have an additional tax free cash portion to withdraw.
Retiring from the GEPF
Pros:
Guaranteed Income for Life: Upon retirement, you receive a monthly pension for life, providing a stable and predictable income stream.
Provision for your spouse: Should you pass way your spouse would receive 50% of your monthly income for their life time.
Medical Aid Subsidy: Retiring members often continue to receive a subsidy for their medical aid contributions, which can be a significant financial relief, especially for those with chronic health conditions.
Lump Sum Gratuity: Members with more than 10 years of service receive a once-off lump sum payment in addition to their monthly pension.
Cons:
Limited Control Over Funds: Once you retire, your pension is managed by the GEPF, and you have limited control over how the funds are invested or used.
No Legacy for Heirs: The pension ceases upon your death, which means there is no opportunity to leave the remaining funds to your beneficiaries
Reduced 1/3 cash portion: Your gratuity (cash portion) is less than ⅓ as you would get from resigning.
Resigning from the GEPF
Pros:
Control Over Retirement Funds: By resigning, you can transfer your pension benefits to an approved retirement fund, giving you control over how your funds are managed and invested.
Potential for Higher Returns: With the ability to invest your funds, there is potential for higher returns compared to the fixed pension provided by the GEPF
Legacy for Beneficiaries: You can nominate beneficiaries to inherit the remaining funds in your retirement account, allowing you to leave a financial legacy.
Increased cash withdrawal: You get your full ⅓ cash portion, plus a tax benefit of any pre-1998 contributions that you may have.
Cons:
Loss of Guaranteed Income: Resigning means you forfeit the guaranteed monthly pension, which can be risky if your investments do not perform well.
No Medical Aid Subsidy: Upon resignation, you lose the medical aid subsidy provided by the GEPF, which can increase your healthcare costs.
Tax Implications: Transferring your funds to a new retirement account may have tax implications, which need to be carefully considered.
How do you figure out what is best for you? Ask yourself these questions:
Do you have dependents? Or a spouse. What is their sources of income?
Do you want to leave a financial legacy to your dependents?
What is your monthly cost of living?
What are your medical expenses, what is your health like?
Do you have alternative income sources like rental income or a side hassle?
Do you have pre 1998 contributions? Do the calculation as the GEPF does not put those figures on your benefit statement for you.
Do you have any debts? List them.
Do you have a financial planner that has your best interest at heart? Always find out what they are earning for their advice as I have seen advisors earn upwards of R 100 000 “guiding” someone into retirement. This is a huge conflict of interest so get unbiased professional help.
Get the following numbers on paper in front of you:
Your after tax income if you resign or retire.
What is your net worth if you resign or retire?
What tax will you be paying if you resign or retire?
How do you want to be spending your years in retirement? A reason for this is if you plan to get a job or run a business by earning money it might be better for you to have an annuity that you can reduce your taxable income until you need the funds so that you are not paying too much tax in retirement.
Your individual needs are important and spending some time with someone who will ask the right questions and guide you to make your right decision is, in my opinion, of utmost importance.
The decision to retire or resign from the GEPF is highly personal and should be based on a thorough assessment of your financial situation, health, and long-term goals. Consulting with a financial advisor can provide valuable insights tailored to your specific needs, helping you make an informed decision that secures your financial future.
