Many employers allow their retirement fund and group risk arrangements to be implemented using salaries equivalent to less than 100% of their employees’ actual salaries.

The obvious upside of this from the employees’ point of view is more cash in their pockets come pay day, but there are two important factors that should be considered before you decide to lower your own fund and risk salary.

The first is that your retirement savings ratio lessens considerably if your contributions are based on a lower salary. The recommended minimum amount to save (from age 23) is 15% of your monthly income over your entire working lifetime. If this fund is kept intact and no withdrawals are made, even when you change employers, this should be enough to provide for a comfortable retirement.

If a fund salary of 50% of actual salary is chosen with a contribution rate of 15%, this will effectively mean an actual contribution rate of 7.5%. This situation obviously worsens if a contribution rate lower than 15% is chosen, which is the case for many employers’ retirement funds in South Africa

The second point to consider is that from a risk insurance point of view you are likely to find that you are underinsured. In terms of group life, this is more of an issue for your beneficiaries, but when it comes to disability lump sum and income protection benefits, you could face serious financial consequences should you become disabled and only have cover for 75% of 50% of your actual salary. This would effectively mean receiving half of whatever disability benefit your employer has in place.

These issues will not arise if you have a Financial Planner who has incorporated these considerations into a financial plan for you and is monitoring it on an ongoing basis. In an uncertain world, it pays to get good financial advice – you could be very glad of it in the future.

– Darren Hartley