Question: I resigned from the company where I have been working for 26 years. What I should do with my pension fund?
Answer: Employees staying with employers for such long periods are the exception rather than the rule these days and I am sure you are reaping the rewards with a substantial accumulated value in your pension fund. Before discussing the various options available to you, you need to consider a number of important questions:
- What are your goals in retirement and how will you fund these?
- Are your pension fund savings your only source of retirement provision or do you have other sources (e.g. retirement annuities, an investment portfolio, etc)?
- Do you have substantial outstanding debt that is placing pressure on your lifestyle?
- How long do you still have to save until you retire?
These are important issues to keep in mind when making decisions that may potentially impact your desired lifestyle now and after retirement.
You should be receiving or would already have received a withdrawal form from your current fund listing the options available to you. The following four options should be reflected:
1. Transfer to pension or provident fund
If your new employer has a pension or provident fund, you may transfer your pension benefit to your new employer’s fund. Transfer to a pension fund is entirely tax free. In the case of a transfer to a provident fund, a small portion of the benefit (around R1800) is tax-free and the balance will be taxed according to your average tax rate.
2. Transfer to preservation fund
It is a good idea to explore the option of transferring your pension benefit to a pension preservation fund. A preservation fund can be considered as a ‘parking bay’ where you can leave your accumulated benefit until you are ready to retire. Upon your retirement, you may access the funds as a retirement benefit subject to its own taxation provisions. You will be allowed to make one withdrawal prior to retirement that will be taxed at your average tax rate.
3. Transfer to a retirement annuity fund
A retirement annuity is a voluntary retirement savings vehicle with tax benefits. This means that it is not linked to employment and you can choose the monthly or annual contributions. These contributions UP to certain limits are tax deductible. Any future career changes can be done with ease as the retirement annuity is in your personal capacity. You can transfer your pension benefit directly to you retirement annuity tax-free.
4. Cash
Should you choose this option, you will be taxed at your average tax rate. I cannot stress enough that this should be your absolute last resort and should not be considered. Even if you do have debts that you want to settle now, you should rather consider transferring your benefit to a preservation fund and withdrawing only the amount required to settle your debt. Taking the full amount in cash creates an unnecessary temptation to spend the left-over cash. If you are close to retirement, 15 years or less, it might not be possible to make up for time lost.
Do you know anyone that has resigned, been retrenched, retired or changed careers? Ensure they are able to make informed decisions by forwarding me their contact details.
Does your company offer retirement benefits such as a Pension Fund or Provident Fund? Now is the perfect time to review your current fund or implement a new fund, please contact me.
