Siphamandla Buthelezi, Head of Platforms and Retirement Fund Administration at NMG Benefits

 

Whether through resignation, retirement or retrenchment, people change jobs all the time. Unfortunately, most of them cash out their pension funds when they do – and it’s one of the biggest reasons why only 6 out of every 100 South Africans end up with enough money to retire, according to the South African Treasury. Siphamandla Buthelezi, Head of Platforms and Retirement Fund Administration at employee benefits advisory firm NMG Benefits, who says there are several options available to employees leaving and changing jobs. Of those, cashing in your pension is by far the worst option, as it means you will have less money available to you when it comes to retirement age.

 

“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 Mr Buthelezi

 

And if you think you can easily catch up on your retirement savings by making additional contributions later, you’re in for 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 Mr 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.

 

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.

 

Talk to 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.

 

ENDS