Editor LauraWhen you’re ready to retire, one of the first things you need to do is figure out how much money you’ll need to save each month in order to have a comfortable retirement. This is especially important if you don’t have access to a pension plan at work. Fortunately, calculating pension fund contribution in South Africa is easy and straightforward. Just follow these steps: 1) Calculate your income 2) Calculate your total pensionable earnings 3) Calculate your required contributions 4) Add these three numbers together 5) Divide this number by 12 to get your monthly contribution 6) Make this payment every month into your pension fund or investment account
Pension Fund Contribution In South Africa
The pension fund contribution in South Africa is determined by the employee’s contractual salary and the age at which the employee starts to receive their pension. The contribution rate for 2019 is 8%.
To calculate your pension fund contribution, you will need to know:
Your contractual salary
Age at which you started receiving your pension (in years)
The South African Retirement Age Multiplier (SARAM) – this is the statutory percentage increase in the retirement age over time
The current year’s salary x SARAM = Pension Fund Contribution
How Pension Funds Work
Pension funds work a little differently in South Africa than most other countries. In South Africa, employees are not required to contribute to the pension fund themselves, but their employers do make a compulsory contribution. The employer then pays this contribution into the pension fund on behalf of their employees.
When an employee retires, the pension fund will pay them a lump sum based on how much they have contributed over their lifetime. This payment is known as a “final salary settlement.” The amount paid will depend on how long you have been employed with your current employer and how much money you have saved in your pension fund.
South African Pension Fund Regulations
The South African Pension Fund Regulations prescribe the calculation of pension fund contributions. The regulations provide a system for calculating the amount that an individual must contribute to their pension fund and for making additional contributions if necessary.
Pension fund contributions are mandatory, and individuals must pay them even if they have no income from other sources. The contribution rate is 9% of an individual’s taxable income, up to a maximum of R180 000 per year. If an individual’s taxable income is more than R180 000 but less than R360 000, the contribution rate is 12%. If an individual’s taxable income is greater than R360 000, the contribution rate is 15%.
Individuals who are self-employed or who have net earnings from self-employment that are not subject to taxation must also make a pension fund contribution. The contribution rate is 12%.
How To Calculate Pension Fund Contribution In South Africa
Pension fund contributions in South Africa can be calculated using a variety of methods, but the most common one is to use the employee’s SPDR® Gold Trust ETF (GLD) return as the basis.
Assuming an employee earns 7% on their investments, and their employer matches that contribution dollar-for-dollar, then the employee’s pension contribution would be:
7% x $10,000 = $700
Employer match = $1,000
Final contribution amount = $711
Employer Contributions
The employer contribution to a pension fund in South Africa is required by law. The amount of the contribution depends on the salary of the employee and the age of the employee.
The following table shows the different rates for employer contributions for employees aged between 18 and 49 years:
Salary Range (Rands) Age at which Contribution is Due (years) Amount of Employer Contribution (%) 18 – 23 1 024 – 1 775 24 – 29 2 826 – 2 990 30 – 34 3 194 – 3 410 35 – 39 4 378 – 4 780 40 + 5 154
Some employers also make an additional voluntary contribution, which can be up to 10% of an employee’s salary. In addition, many employers contribute part or all of their employees’ pension contributions directly into the pension fund.
As a South African, it’s important to keep up to date with changes to the pension scheme, and in this article we will outline how you can calculate your pension fund contribution. We hope that this article has helped you understand the process and given you some pointers on what you need to do in order to make your contribution. If you have any questions or would like help calculating your contribution, don’t hesitate to contact our team at Wealthfront.