Changing jobs represents an option for employees to access their pension fund, and many of them often fall into the trap of cashing it out.
Siphamandla Buthelezi, head of platforms and retirement fund administration at employee benefits advisory firm NMG Benefits, says cashing out your pension is not always the best option as it means you will have less money available to you when retirement age comes.
“Relying on your pension fund benefits will not help you retire comfortably. Many South Africans are being forced to retire earlier than they had planned, we’re living longer and inflation is taking its toll on your investments.
“If you want to maintain the same standard of living in retirement that you had when you were working, you are going to need a sizeable amount of money,” said Buthelezi.
He said cashing up on your retirement savings and trying to catch up by making additional contributions later would only give you a rude awakening.
Depending on when you start contributing again, the required rate could be anything ranging from 17% to 50% of your salary.
So, what are your options when you change or leave jobs?
Move your benefit to a preservation fund: With this option you move your retirement fund benefit into a preservation fund without paying any tax on the benefit. You can choose where your retirement benefit is invested and can switch investment portfolios when you need to.
Preservation funds allow you to make one withdrawal if you need emergency savings at a later stage, but only if you did not take a portion in cash when you left the company.
“It’s important to remember that if you take a withdrawal, it will reduce your retirement savings and you will have to pay tax on any cash that you take out of the fund. If any deductions are made before you transfer to a preservation fund (for example, for a housing loan), that deduction will count as your once-off withdrawal,” said Buthelezi.
Move the benefit to your new employer’s pension fund: Another good option is to transfer your retirement savings to your new employer’s fund without paying tax – with the proviso that you don’t transfer your benefit from a pension fund to a provident fund.
Check with your new employer’s fund where your retirement fund benefit would be invested, and whether that fund allows you a choice of where to invest your benefit.
One of the option is to transfer your benefit to a retirement annuity:
You can also transfer your benefit in the fund to a retirement annuity (RA) fund tax-free. With an RA, you can’t withdraw any money before the age of 55 and you can take up to one-third of your benefit in cash when you retire.
You must use the other two-thirds to buy a pension from an insurer (even if you transferred your benefit from a provident fund). You can also continue to make further contributions to the RA in a tax-efficient way – and you have full control of your investments.
It also help you a great deal to talk a financial adviser: “Before making any big decisions about your options when leaving your employer’s fund, it's a good idea to get advice from a registered financial adviser.
“A financial adviser will be able to help you reach your financial goals and determine which options are best for your personal goals and circumstances,” said Buthelezi.
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