Gone are the days of staying in one job for life. The trend nowadays is to change jobs every five years. When you leave your current employment, the money you or your company contributed to your provident fund, becomes available to you.
Deciding on what you’ll do with this money is one of the most critical – and often overlooked− decisions you can make. Unfortunately, many people aren’t aware of what their investment options are, with regards to their provident or pension fund when they resign from an employer.
So, what are your options?
- To transfer funds from company A to company B
The sensible option is to transfer to another fund. If you belonged to a provident fund, you can transfer tax-free to your new employer’s provident fund OR to a provident preservation fund in your name.
- To invest in a retirement annuity (RA)
Transferring the full value of the investment to a RA is a preferred option as there are will be no tax payable at this stage. With a RA you will be able to access the funds from age 55 onwards (no withdrawals before this age), and when you do retire, only one third of the funds can be accessed as a lump sum, with the remaining funds needing to be invested in a living annuity which will pay you a monthly income.
- To invest into a preservation fund
Preservation funds can be a great vehicle to preserve your retirement savings. They offer more flexibility than an RA in terms of access to funds, as you can make one withdrawal prior to retirement, which could be useful in the event of a major financial crisis. Keep in mind that transfers to a preservation fund are also tax-free. Also keep in mind that most preservation funds do not offer death or disability cover.
- To take the cash
We advise strongly against cashing in. Remember what this money is for: to support you in retirement, not to splash out on a new car. Also remember that you “lose” not just your savings, but also the return you would have earned on those savings, compounding over the rest of your working life. That is a far bigger amount than you imagine.
This option is very detrimental in the long run, as you basically have to start your retirement savings again from scratch. This means you would have to save more each month in order to achieve your savings level required at retirement. For instance: If you cash out at the age of 35, you would have to start saving 19.5% of your salary towards retirement to be in the same position at retirement. If you cash out at the age of 45, the amount required to catch up would increase to 35% of your salary. This is just not feasible! You also run the risk of losing a huge chunk of your retirement savings to the taxman, and remember that a cash withdrawal is taxed at your average tax rate, which could be close to 41% depending on your taxable income. So don’t do it! Don’t loot your retirement account. Instead, keep your money growing in a tax-deferred environment until you actually need it for retirement.
- A combination of cash withdrawal and reinvestment
This option includes taking a portion of the funds available in cash, and transferring the remaining funds to either a preservation fund or a retirement annuity. This option is only recommended if you have debt with a high interest rate. A portion can then be taken to settle the debt in order to reduce your monthly expenses.
We recommend you discuss the various options with your financial planner.
At Real People Assurance, we have qualified and accredited financial advisers to help determine the most suitable option for you. We’ll consider where you are in your career, and what dreams you have for a financially secure future. So speak to us before you make any decisions about your retirement payout.