Having a retirement annuity (RA) in place is one of the critical elements of financial planning. For many, this annuity is 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? We explore these issues.
Saleem Sonday, head of group savings and investments at Allan Gray, says, “An RA is a tax-efficient product to save towards retirement. You can invest in an RA in your individual capacity, but more often, employers offer RAs on a group basis.”
Tip: Register with JustMoney to apply for an RA.
How does a Retirement Annuity (RA) work?
Unlike a pension or provident fund, your Retirement Annunity is not linked to your employer. Instead, it is held in your name and moves with you throughout your working life, says 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 an 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 safeguarded from potential creditors, and yourself, as you cannot access the investment until the 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 their system, but this does not mean your RA membership ends. Instead, you have a few options available to you, as follows.
- You can continue contributing by contacting the provider directly and setting up a debit order from your bank account.
Johan Potgieter, managing director at Acravest, says, “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.”
- You can choose to cash out, as long as the total market value is less than or equal to R15,000. This cash-out requires the completion of a retirement annuity withdrawal form. 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 have been a non-resident of South Africa, in terms of taxes, for three consecutive years. The latter requirement has applied since 1 March 2021.
At age 55 you can access a third of your retirement annuity savings as a lump sum; however, the remaining two-thirds must be used to purchase retirement income. Zwane advises that you do so through a living annuity or a guaranteed life annuity.
If you take the lump sum, you will 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, or you can move your RA to your new employer if it has a group RA scheme already in place.
Zwane says, “You can transfer your retirement annuity into another retirement annuity. You can also transfer from a pension fund, provident fund, and preservation fund into a retirement annuity.”
To effect this change, contact your provider with an instruction to transfer, along with details of the receiving fund. It’s important to note that this process can take six months or longer to complete, as the Financial Sector Conduct Authority must grant approval.
The same process applies to occupational, or pension, funds. “The employee needs to apply at the transferring fund to withdraw,” Sonday explains. “But to transfer their 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.”
The employee should ensure that there are no unresolved tax matters at the South African Revenue Service (SARS) and that the tax number in the fund database is correct.
The transferring fund will submit the transfer amount to SARS, and the receiving fund will do the same on receipt of the monies, thus clearing the transaction. The employee should follow up on the transaction to ensure that there are no unnecessary delays.
What are the challenges of moving your RA?
An important consideration, and potential challenge, is 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,” says Sonday. “An RA restricts access to your investment until age 55, while provident or pension funds allow you to make withdrawals when you resign from your job.”
Potgieter notes that, because of the latter allowance, "leakage" can occur in occupational group funds. This withdrawal attracts tax as a disincentive.
Another issue is that employees do not take ownership of their group fund savings. “It’s as if the perception is that it’s outside of their control and context, when viewing their own wealth being created in the fund,” Potgieter says.
This behaviour can translate into the employee realising too late that his or her long-term savings do not fund the cost of retirement. At that stage, there is not enough time to catch up.
What is your responsibility as the employee in the transfer?
If you are not financially literate, you may miss your responsibility in the transfer process.
Potgieter explains, “The responsibility of the employee is to ensure that he or she receives correct, 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 products costs may be low enough in the new fund to mitigate these. For this reason, employees need to make sure that they fully understand the process.
“While legislation requires advisers to provide this information, employees need to question the information until they really understand,” 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. The longer you save, the harder your money works.
Zwane advises, “Aim to preserve your retirement savings by transferring them to a retirement annuity, where you can continue making contributions.”
While South Africa does not have the best savings culture, it’s important for employees to take ownership of their retirement savings by engaging with their funds to ensure that they receive proper, timeous, and relevant information that will empower them to take ownership of their future.