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By Arno Loots*
Choosing to leave a job is a tough decision. It is usually a long-drawn out process, where one must make life-altering choices for difficult questions. One of the most pressing concerns an employee has to think about is their retirement funds. This choice has short-term repercussions and long-term effects on an employee’s retirement options. Should an employee leave with their money? Should they withdraw it and invest it into another savings product? Transfer from one provident fund to another? And what are the tax and regulatory implications for each of these decisions? It is a lot of information to process and the permutations can seem endless, but it really shouldn’t be if you follow basic rules and finance concepts.
What are the options available?
When you leave your employer, you generally have the following options:
- Withdraw your funds as a lump sum.
- Transfer your funds to your new employer’s pension or provident fund.
- Transfer your funds to an alternative pension or provident preservation fund.
- Consider an alternative retirement annuity fund.
The first option is not advisable, as you will pay tax as per the withdrawal lump sum. You can check the tax liability you will incur on the South African Revenue Services (SARS) website. One must always bear in mind that tax relief on lump sum benefits applies only once in a lifetime. If you have claimed it once, you cannot claim it again.
Then there’s also the loss of future money that you will suffer when you prematurely withdraw your pension funds. In the simplest terms, the money in your pension fund is a pot that grows every month. This growth is a combination of your monthly contribution and the compound interest this money accrues from the underlying investments made on your behalf by a fund solutions provider. The longer this money is allowed to grow in this retirement pot, the more interest it gains. Over time, this interest also starts earning interest, compounding the growth on your initial investment. For example, investments with a 10% return will double every 8 – 10 years. This is why Albert Einstein called compound interest “the eighth wonder of the world.” Depending on your age, you will lose this ‘doubling effect’ two to three times if you constantly withdraw your retirement funds when you leave your job.
The other options are tax-free and by transferring your money to your new employer’s retirement fund or an umbrella fund and keeping it in place, you will fully benefit from the effect of compound interest. Another benefit for you of transferring your retirement funds umbrella funds or your employer’s retirement fund is that you potentially pay lower group fees in comparison to preservation or retirement annuity funds, which are designed for individuals.
Can the funds be accessed by anyone?
By transferring to your new employer’s pension fund or staying in your current fund, neither you nor your creditors can access your retirement fund. There are exceptions to this. One such example is if there is a case of fraud or theft against you by your previous employer. If so, then they are legally entitled to lay a claim to your money to recover what is owed to them. The fund will not pay out any money to the employer until there is either an admission of guilt by the employee or an official court determination that clearly states the amount due to your previous employer.
If unsure about the options available for when you leave your job, you can speak to the HR representative in your company or the person responsible for your retirement fund. Alternatively speak to a qualified financial advisor.
- Arno Loots, Head of Umbrella Fund Solutions, Liberty Corporate