What to do with a pension fund when you leave your job

When you change jobs, you have an option of either a pension payout, a transfer to your new employer’s pension fund, a preservation fund or a retirement annuity (RA). The best option would be to keep your money invested for retirement; either by transferring to your new employer’s pension fund, a preservation fund or a retirement annuity. National Treasury is currently investigating ways to enforce preservation in response to an alarmingly high withdrawal rate of retirement savings prior to retirement. We are already heavily encouraged to preserve our retirement savings through a tax structure. In addition, draw downs of retirement savings can significantly reduce your likelihood of being able to earn enough income in retirement to sustain a desired lifestyle.

Tax Implications of a Pension Payout

You may take an amount in cash from your pension or provident fund before transferring the balance to a preservation fund.  The cash withdrawal will not be considered to be your once-off withdrawal. (This has now been expressly confirmed in RF1/2012.)

As from 1 March 2009, the taxable portion of a pre-retirement lump sum from a pension or provident fund is the amount withdrawn less any transfer to a new fund plus all withdrawal lump sums previously received. This amount is subject to tax at the following rates less any tax previously paid:

Taxable portion of withdrawal Tax Rate
R 0 – R 22,500 0%
R 22,501 – R600,000 18% of the amount over R 22,500
R600,001 – R900,000 R103,950 + 27% of the amount over R600,000
R900,001 + R184,950 + 36% of the amount over R900,000

 

Employer’s Pension Fund

When starting a new job, you will be able to move your pension across to the new employer’s pension fund. (If your current fund is a pension fund and your new employer’s fund is a provident fund, it may not be possible to transfer the funds and hence a preservation fund would be necessary to house your savings.)

Accessibility

A pension fund will only allow you to access your savings upon retirement.

Fund Choice

Your new company’s pension fund may allow investment choice subject to the rules of the fund, but some pension funds have a predefined portfolio. I would recommend that you enquire about the specific fund’s rules. Remember your fund selection will be limited by Regulation 28.

Preservation Fund

A preservation fund is a retirement savings vehicle, which is used as a place to “park” the pension or provident fund payout you get when you resign from your job before reaching normal retirement age. You do not pay tax on your pension fund payout when you transfer it to a preservation plan.

Accessibility

A preservation fund will allow you one full or partial withdrawal before retirement.

In addition, you may transfer from one preservation fund to another at no cost and at any time (see table below for all the transfer options). Even if you think you may not wish to withdraw your savings, this difference may be critical at another stage in your savings lifecycle.

You may transfer your preservation fund to a retirement annuity fund. This transfer will no longer be regarded as a once-off withdrawal. (On 1 February 2013, The Taxation Laws Amendment Act of 2012 was promulgated, which stipulates that a transfer from a pension preservation fund or provident preservation fund to a retirement annuity fund will not be regarded as the member’s once-off withdrawal.)

Fund Choice

Most preservation funds offer investment flexibility, usually through a choice of unit trusts. For a more sophisticated investor, a preservation fund may offer the investment flexibility required. Your fund selection will however be limited by Regulation 28. However, for many investors, too much choice can be problematic and difficult to manage.

Notes

If you were a member of a provident fund with your former employer, then you will transfer your retirement savings to a preservation provident fund. Similarly, if you were a member of a pension fund, then your retirement savings will be transferred to a preservation pension fund.

Retirement Annuity

A retirement annuity (RA) is a savings vehicle that offers you a flexible, tax-efficient way to save for retirement. A retirement annuity is a voluntary pension savings vehicle, where you can make future contributions either on a recurring and/or an ad-hoc lump sum basis.

Accessibility

A retirement annuity does not allow you to withdraw any money before the age of 55 (although there are a few exceptions, such as in the case of disability).

Fund Choice

Most modern retirement annuities (unit trust based RA) offer investment flexibility, usually through a choice of unit trusts. Your fund selection will however be limited by Regulation 28.

What to do

After reading through the list of options, you may be asking what is best for you. Only under exceptional circumstances, should consider cashing in pension fund when changing jobs.

The new employer pension fund may an option, but this is often to inflexible for most people as your money is tied into the fund until you change jobs or retire. Costs are another point to consider for this option as is your choice of fund selection.

A preservation fund probably address most people’s needs as this offers flexibility in that your savings may be accessed prior to retirement should the need arise as well as offering you a personal choice in fund selection. The downside to a preservation fund is that no future contributions may be made to the fund.

A retirement annuity offers you the option of selecting your own funds as well as making future contributions.

A fourth option exists, which is a good hybrid to consider if your new employer does not offer a pension. You could place your previous pension into a preservation fund and continue saving for your retirement by making regular contributions to a retirement annuity.

Finally, costs may also be very different in the above options. It is critical for you to establish the all-in cost of the funds you may be considering. Costs can significantly reduce the performance of your fund. What might appear to be a small difference in cost per annum, will have a significant effect on the value of the investment when measured over a longer period. The cost differential may therefore be a major factor in making a decision.

So, what do you do at the end of the day? Draw up a list of all the pros and cons that are relevant to you.

Notes

If you are already in a provident fund you can transfer into a preservation provident fund and receive a lump sum on retirement, but if you place your money into an RA, then you will get only one third of the fund as a lump sum. The rest will be paid out as a monthly pension.

Comparison

Retirement Savings Vehicle Fund Choice Additional Contributions Accessibility Transfer to Another Fund
Employer’s Pension Fund May allow investment choice subject to the rules of the fund, but some pension funds have a predefined portfolio. Yes You will only be allowed to access your savings upon retirement. Transferable a preservation fund, new employer’s pension fund or a retirement annuity
Preservation Fund Offer more investment flexibility, usually through a choice of unit trusts. No. A preservation fund does not allow for additional voluntary contributions. You will be allowed one full or partial withdrawal before retirement. Transferable to one of the following[1]:

  • One pension fund
  • One pension preservation fund
  • One retirement annuity fund
  • A combination of one pension preservation fund and one retirement annuity fund
  • A combination of one pension fund and one pension preservation fund
  • A combination of one pension fund and one retirement annuity fund
Retirement Annuity Offer more investment flexibility, usually through a choice of unit trusts. Yes You will only be allowed to access your savings upon retirement. Transferable to another retirement annuity

 

 


[1] SARS Practice Note RF1/2012

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