If you've been retrenched or you're changing jobs make sure you preserve the retirement savings you've built up. If you don't, you probably won't be able to retire with enough money to live on, says Thandi Ngwane, head of direct client distribution at Allan Gray.
When you're employed your monthly contributions, together with your employer's, build up for as long as you're a member of your company's pension or provident fund. Together with any investment performance, your accumulated contributions are available to you when you leave the fund, depending on the fund's rules. Some funds, for example, require you to have been a member for a certain period before you're allocated all of your employer's contributions.
If your fund's rules allow, when you leave your employer, you can transfer your retirement benefits to a fund at your new employer, transfer them to a retirement annuity or preservation fund, or take a cash payout. Other options, which once again depend on individual fund rules, are taking early retirement, if you're 55, or deferring your pension, which means staying a member of your current fund until you retire.
Recent changes to legislation mean that if you choose to withdraw your benefits as a cash lump sum, the first R22,500 is tax free. The remainder will be taxed according to a sliding scale ranging from 18% to 36% depending on the amount. However, withdrawing your retirement benefits as cash before you retire could count against you when you retire and might reduce your pension.
"Taking a cash payout is the worst course of action. Not only does it attract the most tax, it also severely hampers your ability to accumulate enough savings to retire with a degree of financial security later on because you miss out on the power of compounding," says Ngwane.
Instead of withdrawing your benefits as cash, you can transfer them from your current employer's pension or provident fund to a pension preservation fund, a provident preservation fund or to a retirement annuity (RA) without paying tax.
If you want the flexibility of making a single withdrawal from your benefits before you retire, consider transferring it into a preservation fund. Pension preservation funds are for transfers from a pension fund and provident preservation fund are for transfers from a provident fund. An RA doesn't allow for any withdrawals prior to retirement.
If you think you'd like to make further contributions to your pension benefits you should transfer them to an RA as preservation funds don't allow further contributions. A retirement annuity allows you to contribute on a regular basis, to interrupt contributions for a period and to stop contributions at any stage.
It's also important to understand that once you retire, you're allowed to withdraw all your capital in cash from a provident fund, whereas with a pension fund the maximum cash withdrawal allowed is one-third of your capital.
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