Having a retirement annuity (RA) in place is one of the critical elements of financial planning. For many this annuity is typically implemented by an employer. But what happens to the fund should you start a job at a different company? And how does this impact your savings?
This week Justmoney explores what you should be mindful of when it comes to your RA if you are considering changing jobs.
What is an RA?
“An RA is a tax-efficient product to save towards retirement. You can invest in an RA in your individual capacity. But more often some employers offer RAs managed on a group basis,” says Saleem Sonday, head of group savings and investments at Allan Gray.
How does an RA work?
Unlike a pension or provident fund, your RA is not linked to your employer. Instead, it is held in your name and moves with you throughout your working life, even when you change jobs, adds Sonday.
This means that if you are invested in an RA that is managed on a group basis through your employer, your employer merely plays an administrative function. These functions include facilitating contributions from your salary.
According to Sonday, if you carry on making contributions, you will continue to enjoy the benefits that a RA offers, such as:
- Tax benefits: Your contributions are tax-deductible and the returns that you earn while invested are tax free.
- Protection: Your investment is also safeguarded from potential creditors and yourself. Simply put, this means you cannot access the investment until the minimum retirement age of 55, or under certain stipulated circumstances. This is to protect you and to ensure that you will have money to retire with, rather than having to rely on a government pension grant that may not afford you a comfortable retirement.
What is the process, should you resign?
If you choose to resign, your employer will remove you from its system, but this does not mean that your membership to the RA ends.
Instead you have a few options available to you. These include:
- You can continue to make contributions by contacting the provider directly and setting up a debit order from your bank account.
“An RA is a flexible product meaning that you can pause your contributions, change the amount, make lump-sum contributions, or change your underlying unit trust selection – at any time – if your needs and/or circumstances change,” says Johan Potgieter at iRetire.
- You can choose to cash out. But you can only do so if the total market value is less than or equal to R7 000. If the value is more than this, you will not be able to access the investment until you reach 55, or if you become permanently disabled or you emigrate, Potgieter explains.
“But remember, the tax on resignation benefit pay-outs is harsh – only the first R25,000 being tax-free with the remainder taxed at a scale starting at 18%. The tax-free portion applies once in a lifetime, meaning if you have used it up previously it will not apply to any future withdrawals,” adds Sohini Castille, head of employee benefits consulting at 10X Investments.
This also means that you then forfeit the power of compound interest which - if you do the math - could be quite sobering.
- You can transfer your RA to a different provider.
- You can also move your RA to your new employer if it has a group RA scheme in place.
“This way you can simply continue to contribute to your accumulated retirement savings at your new employer. Your money remains invested for growth and won’t incur any unnecessary fee charges or punitive tax deductions,” says Castille.
This you can do by contacting your provider with an instruction to transfer, along with details of the receiving fund. But remember, this is a lengthy process and can take up to six months or longer to complete as the Financial Sector Conduct Authority must grant approval.
- You could transfer your money into an investment fund in your own name. These individual funds are called preservation funds or retirement annuities and are offered by companies such as 10X Investments.
“In transferring to one of these you can avoid paying tax on your savings and keep your money invested for growth,” Castille says.
When it comes to the specific process for both RA and occupational funds, the procedure is aligned.
“The employee needs to apply at the transferring fund to withdraw. But to transfer his / her monies to another fund (normally an option on the withdrawal form) the receiving fund information needs to be provided to the transferring fund, together with the application form of the receiving fund,” explains Sonday.
The employee should ensure that there are no unresolved tax matters at the Commissioner of Inland Revenue (SARS), and that the tax number in the fund’s database is correct. The transferring fund will submit the transfer amount to the Commissioner of Inland Revenue and the receiving fund will do the same at receipt of the monies, clearing the transaction. The employee should follow up on the transaction to ensure that there are no unnecessary delays.
What are the challenges?
Another important consideration that could become a challenge, is around your new company’s offerings.
“If your new company only has a provident or pension fund, you will not be able to move your RA to the company as these products have different rules. An RA restricts access to your investment until age 55, whilst provident or pension funds allow you to make withdrawals when you resign from your job. Legislation that governs retirement funds does not allow you to transfer your investment from a more restrictive product to one with less restrictions,” outlines Sonday.
According to Potgieter, the problem with ‘’leakage’’ when changing jobs is in the occupational group funds, where a member can withdraw at any stage before retirement. This withdrawal then carries tax as a disincentive to withdraw.
Other challenges in these instances include:
- Employees do not take ownership of their retirement fund savings. “It is as if the perception is that it is outside of their control and outside of their context when viewing their own wealth being created in the fund,” Potgieter adds.
- The behaviour outlined above often then translates into the employee realising too late that his/her long-term savings does not fund the cost of retirement. But at that stage, there is not enough time to catch up on funding.
What is your responsibility as the employee in the transfer?
If you are not well-versed in financial literacy you may unfortunately miss your responsibility in this process.
Potgieter explains: “The responsibility of the employee (on these transfers) is to ensure he/she receives proper objective advice regarding the characteristics of the current product, versus the characteristics of the product to be transferred to.
“The employee should also be aware of the cost implications of the transfer, as there are often once-off charges that could be substantial.”
Once-off costs are often worth it, as there are products where the costs in the new fund are low enough to provide a good return on that once-off loss. For this reason, employees need to always make sure that they understand the process properly.
“While legislation requires advisers to provide this information on replacement of products, employees still need to interrogate the information until they really understand – not just taking somebody’s word for it,” Potgieter says.
Is it best to keep your RA going?
Although an option, in certain situations cashing out your retirement savings when changing jobs is one of the biggest and most common retirement savings mistakes.
“According to various industry surveys, between 70% and 80% of employees don’t preserve their retirement savings when they change jobs. This is a big mistake because the money you save in the early years of working grows exponentially, thanks to the magic of compounding, which is like a snowball effect,” adds Castille.
According to her, the money you save in the early years, works the hardest.
“By spending it, your younger self denies your older self the benefit of these savings that were intended for retirement, and you also lose out on all the growth on these savings, which quite possibly would be more than the original amount you saved,” Castille says.
While South Africa does not have the best savings culture, it is important for employees to take ownership of their retirement savings through engagement with their funds to ensure that they receive proper, timeous and relevant information that will empower them to take ownership.
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