In the past, employers pretty much took the responsibility for making sure that their employees got sufficient pensions. The most common type of plan was called a defined benefit plan. It meant that the employee took no investment risk, and they knew exactly how much they would end up getting each month in retirement.

Owing to the fact that life expectancies have been steadily increasing over time, defined benefit plans have become less popular for organisations. Today, companies are moving towards defined contribution (provident) plans which means that your pension will rely on the performance of the investment markets.

Watch out for tax

The main difference between a provident plan and a pension plan is the tax implications.

With a provident plan the employer?s portion of the contribution is tax deferred but your contribution is not. This means that that on retirement your contributions are not taxed when you withdraw them. Often you will find that a company will cover the entire amount of the contribution to the plan. This enables them to claim those payments against tax.

When you retire the money is paid to you in a lump sum. You then have to reinvest this money to accommodate your annual retirement funding. If you change jobs you will be paid out the entire amount owing to you.

It's not a windfall!

And this is where many South Africans come unstuck. Instead of reinvesting this money, they consider it to be a windfall, so they spend the money. What they fail to realise is that if, for example, they have been with a company for five years and they spend the money, they have effectively shaved five years off their retirement funds.

If tax was deferred on the money, as soon as they opted to spend it they would be liable for tax. So let's assume they received a lump sum of R100 000 and their marginal rate of tax was 40 percent, R40 000 would immediately be lost. If they had reinvested the money for a period of 10 years instead, and it grew by 10 percent per annum, it would be worth R271 000. So the lost opportunity costs of spending the money are enormous. If you change jobs every few years and habitually spend this money you can say goodbye to your place in the sun in retirement.

Saving extra cash for your retirement

Take the time to ask your employer about your provident fund and find out how it works. It is also worth bearing in mind that most people are under-funded by at least 20 percent in retirement.

So don?t assume that your company pension will be sufficient for retirement. You should enlist the services of a financial planner to ascertain how much you will need to save each month to reach your goals.