Pension Fund Contribution and Taxation
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Questions and Answers

What is the purpose of the National Credit Act?

To regulate all credit agreements

What is the main advantage of a pension fund?

Employee may deduct up to 7.5% of salary for tax purposes

Why is homeowner's insurance compulsory if you have a home loan?

Because it is a requirement for home loan

What is the key difference between a pension fund and a provident fund?

<p>Employee's contributions are tax deductible in a pension fund, but not in a provident fund</p> Signup and view all the answers

What is the significance of the repo rate in relation to debt consolidation?

<p>It is the rate at which SARB lends money to commercial banks</p> Signup and view all the answers

What is the purpose of diversification in investment portfolios?

<p>To reduce risk by investing in 2 or more asset classes</p> Signup and view all the answers

How does a retirement annuity differ from a pension fund?

<p>It is a one-man pension plan</p> Signup and view all the answers

What is the implication of tax efficiency on investment decisions?

<p>It provides tax benefits attributed to the particular investment</p> Signup and view all the answers

What are the three categories of credit agreements regulated by the National Credit Act (NCA)?

<p>Small (R0 - R15 000), intermediate (R15 001 - R250 000), and large (R250 001 and above)</p> Signup and view all the answers

What is the purpose of the more detailed application process introduced by the NCA?

<p>To prevent reckless lending</p> Signup and view all the answers

What is the significance of the 5-day period in the NCA?

<p>It allows consumers to consider a quote before it expires</p> Signup and view all the answers

How can you reduce your mortgage repayment term by half?

<p>By paying 15% extra on your monthly repayment</p> Signup and view all the answers

What is the main characteristic of a preservation fund?

<p>It can only accept transfers from other pension or provident funds</p> Signup and view all the answers

What is the key difference between a pension fund and a provident fund?

<p>Pension funds require a guaranteed retirement benefit, while provident funds do not</p> Signup and view all the answers

What is the limit on the deduction an employee can claim for contributions made to a pension fund for tax purposes?

<p>Up to 7.5%</p> Signup and view all the answers

What happens to the employer's contributions to a pension fund in the employee's hands?

<p>It is taxed as a fringe benefit</p> Signup and view all the answers

What is the significance of the retrospective application of the NCA to all credit agreements?

<p>It applies to all agreements from 1 June 2007, regardless of when the agreement was entered into</p> Signup and view all the answers

What is the maximum amount that can be taken as a cash lump sum at retirement from a pension fund?

<p>1/3 of the fund value</p> Signup and view all the answers

What is the benefit of knowing who the Finance & Insurance Manager/Business Manager represents when assisting with a finance application?

<p>It provides transparency and accountability in the finance application process</p> Signup and view all the answers

What is the primary difference between a pension fund and a provident fund at retirement?

<p>A pension fund requires investment in an annuity fund, whereas a provident fund allows access to the entire fund value</p> Signup and view all the answers

Why is it not advisable to use an access bond to finance a car?

<p>A car is not an investment, and it depreciates immediately, whereas a house is a valuable investment that increases in value</p> Signup and view all the answers

What is a potential long-term implication of using an access bond to buy a car?

<p>Difficulty in trading the vehicle and replacing it with a new one, leading to a long-term debt burden</p> Signup and view all the answers

What is one of the primary reasons for buying a home, according to the passage?

<p>It will ultimately increase in value, making it possible to upgrade to a better home</p> Signup and view all the answers

What is the context of debt consolidation in the passage?

<p>It is mentioned as a popular motion, but not recommended for financing a car using an access bond</p> Signup and view all the answers

Study Notes

Pension Fund

  • No limit on employer contributions from 1 March 2016.
  • Employer contributions are taxed as fringe benefits in employee's hands.
  • Employees can deduct up to 7.5% of salary for tax purposes.
  • At retirement (between 55 and 69), up to 1/3 of fund value can be taken in cash as a lump sum, subject to tax.
  • At least 2/3 of fund value must be invested in an annuity fund, which pays a taxable monthly, quarterly, or annual income.

Provident Fund

  • No limit on employer contributions from 1 March 2016.
  • Employee contributions are not tax deductible.
  • At retirement (between 55 and 69), entire fund value can be accessed, subject to tax.
  • Investor can use the funds as desired.

Debt Consolidation and Home Loans

  • It's not wise to use an access bond to finance a car purchase.
  • Cars depreciate quickly, while houses are valuable investments.
  • Using a bond to buy a car can undermine the underlying investment and make it difficult to trade or replace the vehicle.

National Credit Act (NCA)

  • Regulates all credit agreements, categorized into small, intermediate, and large.
  • Requires a detailed application process to prevent reckless lending.
  • Gives rights to consumers and obligations to credit providers.
  • Applies retrospectively to all agreements from 1 June 2007.
  • No early termination fees are payable on small and intermediate agreements.
  • Provides a 5-day period to consider a quote.
  • Clients have the right to receive documentation in their preferred format.
  • Clients have the right to know why finance was declined.
  • Fees and charges on credit agreements are prescribed and limited.
  • Clients have the right to know who the Finance and Insurance Manager/Business Manager is and who they represent.

Mortgage Repayment

  • Paying 15% extra on monthly repayment can reduce the mortgage repayment term by half.

Preservation Funds

  • Registered in terms of the Pension Funds Act and Income Tax Act.
  • No recurring contributions are allowed.
  • Accepts transfers from other pension or provident funds in cases of resignation, dismissal, or winding up of the fund.
  • One big advantage is that investors can make one taxable withdrawal before age 55.

Other Key Concepts

  • Defined Contribution Fund: employee's share of the fund is determined by the fund value.
  • Diversification: investing in 2 or more asset classes to reduce risk.
  • Repo rate: the rate at which the South African Reserve Bank lends money to commercial banks.
  • Risk tolerance: the amount of risk an investor is prepared to accept.
  • Tax efficiency: tax benefits attributed to a particular investment.
  • Tax-exempt yield: the percentage of total investment that's tax exempt.
  • Volatile investments: risky investments with high potential exposure to losses and gains.

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Description

This quiz covers the rules and regulations regarding pension fund contributions, tax deductions, and withdrawals in South Africa.

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