Don’t cash in your pension funds when you resign

You must never cash in your pension funds when you resign. Cashing in your pension whether you resign, retire or are retrenched is one of the biggest reasons why only six out of every 100 South Africans end up with enough money to retire.

When employees leave jobs they have several options to choose from when it comes to their pensions, but cashing it in can be the worst option. It means you will have less money available when you retire, says Siphamandla Buthelezi, head of platforms and retirement fund administration at employee benefits advisory firm NMG Benefits.

“Relying on your pension fund benefits will not help you retire comfortably. Many South Africans are forced to retire earlier than they planned, while we are also living longer and inflation takes 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 will need a sizeable amount of money.”

He warns about thinking you can easily catch up on your retirement savings by making additional contributions later. If you do, you are 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.

What other options do you then have when you change or leave your job? Buthelezi says you have several options, such as moving your benefit to a preservation fund, moving it to your new employer’s pension fund or transferring your benefit to a retirement annuity.

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Moving your benefit to preservation funds

If you choose this option, you will not pay any tax on the benefit. You can choose where your retirement benefit is invested and you 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 is 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. 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,” Buthelezi says.

Moving 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. However, if you choose this option, you cannot 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.

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Transferring your benefit to a retirement annuity

You can also transfer your benefit to a retirement annuity (RA) fund and this is also tax-free. However, with an RA, you cannot 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 about pension funds

Buthelezi urges consumers to first talk to a financial adviser. “Before making any big decisions about your options when leaving your employer’s fund, it is a good idea to get advice from a registered financial adviser who will be able to help you reach your financial goals and determine which options are best for your personal goals and circumstances.”