Employee benefits often look impressive on paper. A pension contribution, group life cover, disability benefits and medical aid support can make a remuneration package feel far more generous than the salary figure alone.
At CS Wealth, we believe employee benefits are valuable, but they are often misunderstood. The question is not only, “Do I have benefits?” The better question is, “What are my benefits actually based on, and what am I really getting?”
This month, we unpack the difference between basic salary, cost to company and pensionable salary, how benefits are calculated, how approved and unapproved life cover works, and why the small print matters.
Basic salary, cost to company and pensionable salary
One of the biggest misunderstandings in employment packages is the difference between basic salary and cost to company.
Your cost to company is the total cost your employer carries for employing you. This may include your cash salary, pension or provident fund contributions, risk benefits, medical aid contributions, group life cover, disability cover and sometimes other allowances.
Your basic salary is usually the cash salary used for payroll calculations, before tax and deductions.
Your pensionable salary is the portion of your salary used to calculate retirement fund contributions and certain employee benefits. This is where many people get caught out.
If your pension contribution is 10%, the important question is, 10% of what? If it is 10% of your pensionable salary, and your pensionable salary is only 70% or 80% of your total cost to company, then your real retirement saving is lower than it first appears.
This matters because many benefits are not calculated on your full package. They may be calculated on pensionable salary, basic salary, or a capped benefit amount.
What are your benefits worked out on?
Most employer benefits are built around internal payroll definitions. These definitions are not always obvious to employees.
Group life cover may be shown as three times annual salary, but that could mean three times pensionable salary rather than three times total cost to company. Disability benefits may replace a percentage of salary, but bonuses, commissions, allowances and profit share may be excluded.
This creates a practical problem. Your lifestyle may be based on your full earnings, while your protection benefits may be based on a smaller salary definition.
A benefits statement can therefore look strong, while still leaving a meaningful shortfall.
For example, if someone earns a cost-to-company package of R800,000, but their pensionable salary is only R600,000, a benefit calculated at three times salary may provide R1.8 million of cover instead of R2.4 million. That R600,000 difference can be significant for a family relying on that cover.
The cost structure: What is actually being saved?
Another common misunderstanding is the way benefits are presented inside a cost-to-company package.
When an employer says they contribute to your retirement fund or risk benefits, this does not always mean it is an additional amount over and above your package. In many cases, the contribution forms part of your total cost to company. That means it reduces the cash portion available to you each month.
This does not make the benefit bad. It simply means it should be understood correctly.
There is also an important difference between saving and paying for protection. Retirement fund contributions build long-term capital. Risk premiums, such as group life or disability cover, are insurance costs. Medical aid contributions are health protection costs. All are valuable, but they are not the same thing.
A simple way to think about it is this:
- Retirement contributions are usually the part being saved for your future.
- Risk premiums are the cost of protecting your income or family.
- Medical aid contributions are the cost of healthcare access.
- The balance becomes your taxable cash income and eventual take-home pay.
This is why a strong-looking package can feel smaller once benefits, tax and deductions have been applied. The real question is not only what your package is worth, but how much of it is going toward long-term wealth, how much is insurance, and how much reaches your bank account.
The tax treatment of retirement contributions
Retirement fund contributions can be tax efficient, but the mechanics can be confusing.
Employer contributions to a pension or provident fund are generally treated as a taxable fringe benefit in your hands. However, qualifying retirement fund contributions are also deductible, subject to the annual limits. This means the tax effect can often be neutral or beneficial, depending on your full tax position.
The current annual deduction limit is 27.5% of the greater of remuneration or taxable income, capped at R430,000 for the tax year.
This is useful, but it also means the benefit is not as simple as “the employer pays and I get it for free”. It forms part of your tax and remuneration structure and should be reviewed as part of your broader financial plan.
Approved vs Unapproved life cover
Many employer benefit structures include group life cover. This can be structured as either approved or unapproved cover.
Approved life cover is linked to a retirement fund. If the employee passes away, the benefit is paid as a retirement fund death benefit. This means the benefit is dealt with under retirement fund rules and taxed according to the retirement fund lump-sum tax table.
This can be less favourable than many employees expect. The payout may not go directly to the nominated person in the way a personal life policy would, and the trustees of the fund have a duty to consider legal and financial dependants. The tax treatment can also reduce the final amount received.
Unapproved life cover sits outside the retirement fund. It is usually more direct and flexible because it can be paid according to the policy structure and beneficiary nomination. It may still have estate planning and tax implications, but it is not taxed in the same way as an approved retirement fund death benefit.
Neither structure is automatically wrong. The important point is that employees should know which type they have, how it pays, who controls the payment decision and what tax consequences may apply.
The small print: Waiting periods, caps and conditions
Employee benefits are useful, but they come with terms and conditions.
Disability or income protection benefits often include waiting periods, commonly three or six months depending on the scheme. This means the benefit may only start paying after you have been unable to work for that period.
Group benefits may also include:
- Maximum monthly benefit limits
- Definitions of disability that may change over time
- Actively-at-work requirements
- Medical evidence requirements at claim stage
- Benefit reductions if other income is received
- Cover that falls away when you leave the employer
This is why employee benefits should not be treated as a full financial plan on their own. They are a base layer, not always complete protection.
Why benefits are not always as good as they look
Employers often present benefits as part of a strong overall package, and in many cases they are valuable. However, the value depends on the details.
A benefit calculated on pensionable salary may be lower than expected. A group life benefit may be taxable as a retirement fund benefit. Disability cover may only start after a waiting period. Cover may be capped. Benefits may fall away when employment ends.
This does not mean employee benefits should be ignored. It means they should be properly understood.
Our View At CS Wealth (Pty) Ltd
At CS Wealth, we often find that the real gap only becomes visible when the full package is unpacked. What looks sufficient at first glance may not match the client’s real income, debt, family responsibilities or lifestyle costs. Employee benefits can form an important part of your financial plan, but they should never be accepted at face value.
The key is to understand what your benefits are based on, how they are taxed, when they pay, and what happens if you leave your employer.
At CS Wealth, we review employee benefits alongside personal cover, retirement planning and estate planning. This allows us to identify shortfalls, avoid duplication and ensure that your benefits support your financial plan rather than create a false sense of security.
If you would like us to review your employee benefits and explain what you are actually covered for, our team is here to help.
CS Wealth (Pty) Ltd is a licensed financial services provider. This newsletter is intended for general educational purposes and does not constitute financial advice.
