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Employee Benefits | Reid RaetzerReid Raetzer

Employee Benefits

Employee benefits have become of key importance to any organisation that wishes to take good care of its employees. For more information on the full spectrum of available benefits, from medical aids to pension funds, please contact one of our expert employee benefits consultants.

Employers use pension funds to provide an income at retirement for their employees. Both the employer and employee contribute to the pension fund at a percentage of the employee’s salary. In most instances, the employer also pays for the administration and risk costs of the fund. The employer will deduct the employee’s pension fund contributions from his or her salary and pay the entire contribution to the fund administrators.

For example: Mr Jones is employed by XYZ Rubber and earns R 10 000 per month. His contributions to the fund are 7.5% of salary, i.e. R 750 per month, which is allocated to savings only. The company pays an additional 7.5% of which 5.5% is allocated to savings and 2% is allocated to the cost of risk benefits and administration charges. Pension fund contributions reduce the employee’s taxable income and therefore his or her income tax. The employer does not receive a tax benefit.

At retirement, Mr Jones may take out one third of the proceeds as a cash lump sum. Of this, the first R 120 000 is tax free*, the balance is taxable at his average tax rate. The remaining two thirds has to be invested in an annuity with a registered administrator, who will pay a monthly income which is subject to tax at the investor’s marginal tax rate.

The tax-free portion may be greater than R 120 000 using the formula ‘Z=C+E-D’. ‘Z’ is the tax free amount / ‘C’ = number of years service divided by a factor of 10 and multiplies by the highest average annual salary (max R 60 000) over five years. ‘E’ represents previously disallowed contributions and ‘D’ represents the total tax free amounts received from other approved funds.

Provident funds provide for the retirement income needs of employees where, as with the pension fund, both the employer and employee contribute a percentage of the employee’s salary.

However, unlike a pension fund, the contributions are tax deductable in the hands of the employer, with no tax benefit to the employee. On maturity, the employee’s contributions are tax exempt and only the employer’s portion taxable. The individual is also able to take the entire proceeds as a cash lump sum and does not have to invest in an annuity. The tax free portion on the employer’s contributions is based on the same formula as that applied to pension funds

The company may include various risk benefits to its pension or provident fund in order to provide for its employees in case of death, disability, dread disease, illness or accident to pre-fund funeral costs. The main purpose for including risk benefits is not only to provide for employees who become disabled or die, but also to discharge the employer’s moral obligation to assist them or their families in a time of need. Financially assisting employees can result in a substantial drain of company capital and cash flow.

It is cheaper for these individuals to have risk cover included in their group benefit scheme than to take out individual life policies. In the event of one of the above circumstances, the affected employee or his family will receive a lump sum to help him/her or the family financially. (This doesn’t apply to the monthly income benefit which will make monthly payments up to a maximum of 75% of the individual’s salary).

The level of cover that each employee qualifies for is calculated at a factor multiplied by annual income. This factor is determined by the employer and can vary for different categories of employees such as directors, managers and others. For example, Mr Jones, who earns R 120 000 per year and whose employer has determined that his life and disability cover should be 5 times his annual salary, would have life and disability cover of R 600 000.

We offer various schemes provided by three medical aid companies: Discovery Health, Momentum Health and Provia. These are available in the form of corporate medical aid schemes or on an individual basis.

As there are so many different options available, we recommend that you contact our offices for an individual consultation.

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