Domestic workers, who are among the most financially vulnerable employees in South Africa, can now access a new financial product that may give them greater security in their old age.
Old Mutual, in conjunction with the Presidential Working Group on Women (PWGW), has launched a flexible retirement annuity (RA) product, the Domestic Workers' Plan, to meet the specific needs of domestic workers.
The new RA fund is far more flexible than traditional RA products to allow for the often inconsistent income flows of domestic workers.
The product will enable employers to help their domestic workers secure an income in retirement, while also providing family funeral cover and health support services.
The product will enable employers to help their domestic workers secure an income in retirement, while also providing family funeral cover and health support services.
There are about one million domestic workers in South Africa.
The PWGW, which is headed by former Life Offices' Association chairperson Gloria Serobe, represents business, labour and non-government organisations. It was established by President Thabo Mbeki last year to address the social and economic challenges facing women.
The contribution payments are structured as follows:
- The minimum term of the policy is 10 years, but you cannot withdraw any money until you are 55.
- Premiums can be paid by debit order only. The debit order can be on the bank account of either a domestic worker or his or her employer.
The designers of the policy realised that the debit orders are likely to be on the employers' accounts, because few domestic workers have access to cost-effective debit order facilities or even have bank accounts.
- Four contribution options are available. They are:
1. R85 a month, of which R50 goes towards retirement savings. This option pays out R7 000 in funeral cover to the domestic worker and his or her family.
2. R100 a month, of which R50 goes towards retirement savings. It provides R10 000 in funeral cover.
3. R150 a month, of which R100 goes towards retirement savings. It provides R10 000 in funeral cover.
4. R200 a month, of which R150 goes towards retirement savings. It provides R10 000 in funeral cover.
You cannot inject a lump sum payment into the plan.
- Contributions to the RA fund increase automatically each year in line with inflation. Currently, contributions increase by six percent a year. The percentage will change to keep pace with inflation.
You can decline the automatic increase when you are notified of it, but rejecting the increase will result in lower
retirement benefits.
- Employers can choose to pay the contributions over and above their domestic workers' wages, or domestic workers can pay the contributions from their own wages, or both employers and their domestic workers can contribute.
The funeral plan, which is a separate policy to the RA fund, includes the following:
- Funeral cover for the member, one spouse and up to six children until they reach the age of 21. Provision is made for full-time students to be covered until the age of 26, as well as funeral cover for life for children with mental or physical handicaps. It also includes two claims for stillborn children.
The funeral cover benefit stops when a domestic worker retires. If the domestic worker dies before retirement, cover for the spouse and children stops.
- Funeral support. These benefits include:
* Transportation of the deceased from anywhere in the world to the funeral home closest to the place of burial in South Africa;
* Advice on claims procedures;
* Advice or assistance from Old Mutual's Family Support Services call centre concerning issues such as obtaining the required legal documents;
* Referral to a pathologist (if necessary); and
* Advice (from the call centre) on undertakers and other funeral services, including helping to find a tombstone-maker.
This includes health advice, support in the event of trauma, assault or testing HIV-positive, as well as emergency medical response. All these services can be accessed by telephoning Old Mutual's Family Support
Services call centre.
The Domestic Workers' Plan is far more flexible than traditional RAs in which your policy becomes paid-up and confiscatory penalties of up to 30 percent are levied on your retirement savings if you stop paying the premiums. (Paid-up means your accumulated savings remain invested until you retire, which must occur between the ages of 55 and 69.)
Domestic workers, whose jobs are often insecure, are particularly vulnerable to not being able to maintain their premium payments.
With the Domestic Workers' Plan, fund members may, if they have made six contributions, skip six payments over the term of the product without losing their benefits. (These may be six consecutive payments or they may be separated by any period of time.)
The funeral cover ceases and the RA becomes paid-up if the member:
- Has paid less than six contributions and stops payments; or
- Having made six consecutive payments, does not pay for six months plus an additional 31-day grace period.
When the RA becomes paid-up, a one-off charge of R150 is levied against the member's accumulated credit, but his or her savings remain invested until a benefit becomes payable. Thereafter, there is a three-month period during which the funeral cover can be reinstated by making up the payments.
The entire plan can also be reinstated up to three years after contributions have stopped (the policy has been made paid-up) if the member repays all the missed contributions.
The member needs to repay only that portion of the contributions that are used to fund the RA savings and not the risk benefits.
If the domestic worker dies before retirement, the trustees of the RA fund will pay a benefit to the workers'
dependants, as provided for in the Pension Funds Act.
Members can help the trustees decide how to award the benefits by nominating beneficiaries.
If a beneficiary receives a benefit greater than the defined limit (as stated in the policy document), the benefit must be used to purchase an annuity (a monthly pension).
Should the domestic worker become disabled and unable to continue working, he or she has three options. These are:
1. The retirement benefit is made paid-up, in which case all contributions stop and a smaller retirement benefit is paid out when the domestic worker retires.
2. The domestic worker continues to contribute, but Old Mutual may decide to switch the benefits to new policies. The retirement benefit then becomes available at retirement (between 55 and 69 years).
3. The domestic worker receives the retirement benefit immediately as an early retirement benefit (he or she does not have to be 55 years or older). After that, no further contributions will be required and no further benefits will be paid out.
If the total retirement benefit is less than the prescribed minimum (currently, any capital amount less than R75000), the entire benefit is paid out as a cash lump sum when the domestic worker retires.
If the total retirement benefit is more than the prescribed minimum, up to one-third may be paid out as a cash lump sum and the rest must be used to purchase an annuity.
The product in most cases will not have tax benefits for either employers or employees. This is because:
- Most domestic workers' incomes are likely to fall below the tax thresholds - the amount you must earn before you have to pay tax before and after retirement.
The current thresholds are R43 000 a year if you are younger than 65, and R69 000 a year if you are 65 or older. This means the incentive of claiming contributions as a deduction against taxable income does not apply.
On maturity, any amount under R75 000 can be withdrawn as a lump sum, which would be tax-free because the first R300 000 of an RA lump sum is exempt from tax. However, if the amount is above R75 000, only one-third may taken as a lump sum and the balance must be taken as a monthly pension. The pension will be tax-free below the tax thresholds.
- Employers cannot claim contributions they make to the fund as a tax deduction.
These include R7 on each contribution received. Ongoing asset management fees are charged on the fund in which the RA policy invests.
The retirement savings are invested in an Old Mutual Smooth Bonus Portfolio, which smoothes out the performance of the underlying investments over time. There are no investment guarantees.
Before joining the Domestic Workers' Plan, employers and domestic workers should consider the following issues:
- Eligibility. A domestic worker must be at least 10 years from retirement when joining the fund. This means that the domestic worker cannot be older than 59.
- Waiting period. There is a six-month waiting period during which claims for the Family Funeral Cover Plan will not be paid out if the member dies within six months from the date on which the first contribution was made. The waiting period falls away if the member's death is due to an accident.
- Correct information. The application form must be filled in carefully because Old Mutual may refuse to pay out benefits if there is evidence of fraud or that false information was provided on the application form.
- Withdrawals. No partial withdrawals are allowed.
- Cooling-off period. There is a 30-day cooling-off period, which starts from the day on which the member receives the policy document. During this time, the policy can be cancelled and any contributions will be refunded.
You can contact the call centre on 0860 688 825(Mondays to Fridays between 8am and 5pm; local Telkom rates apply) or download an application form from www.domesticworkersplan.co.za.
The completed application form should be faxed or emailed to Old Mutual, which will then post you a Domestic Workers' Plan start-up pack that contains:
- A Domestic Workers' Plan membership card and a family support services membership card for the domestic worker; and
- An employer's card, which grants access to a website that provides information about financial planning, among other things. If the employer is not involved, the worker will still receive the employer's card.
On successful application, the worker becomes a policyholder of the Family Funeral Cover Plan and a member of the South African Retirement Annuity Fund.