You're leaving your job and will receive a tidy sum from your pension or provident fund. Do you put the money in your bond, invest in unit trusts, fly off to Mauritius, or transfer the money into another retirement fund? Sadly, the correct answer is not the tropical island.
Too few people accumulate enough money during their working years to afford a comfortable retirement. One of the main reasons is job hopping.
Each time you change jobs you lose out on a portion of your accumulated retirement fund benefit because most retirement funds do not pay out your full entitlement when you resign.
Depending on the rules of the fund, the amount you will be paid out can range from a return of your own contributions, or your own contributions plus interest, or your own contributions plus interest plus a portion of the contributions paid in by your employer.
It pays to investigate your fund's rules before resigning: leaving a month later may entitle you to a greater portion of your employer's contributions.
The problem of reduced benefits paid on resignation is compounded by the rising tendency for fund members to take their benefit as a cash payout (to spend or to pay off a debt), rather than transferring the money into a new fund.
There is another big drawback of taking the cash option - tax! You pay tax on the pay-out you receive from your fund less the following two amounts: R1 800 and your contributions not previously allowed as a tax deduction (see the R1 800 as a bonsella from the taxman). The tax you'll pay is calculated using your average tax rate: the higher of this year's and last year's rates.
There is yet another disadvantage of taking the cash option, as explained by Alan McCulloch (AGM Marketing - Retirement Funds at Liberty Life): "Taking the cash can prejudice the tax-free amount you are entitled to on your retirement. Under current tax law, the formula used to calculate this tax-free amount is partially based on the total years of fund membership - that's in all funds throughout your working lifetime and with all employers. Each time cash is taken, the accumulated years of service are cancelled."
There are essentially four ways to preserve your benefit and to avoid paying tax:
* Leave the money in your old company's fund until retirement (provided the fund rules allow for this). The advantage to you is your benefit will continue to grow in the fund and your precious years of previous service will remain intact.
* Transfer the money into your new company's fund. Tax law dictates that you can transfer from a provident fund into a pension fund, but not the other way around. Check that your new fund's rules will take into account your previous years of service.
* Transfer the money into a retirement annuity fund. The downside of this option is you lose out on your years of service and cannot access your money until your 55th birthday.
* Transfer the money into a preservation fund - this is your most flexible option. This is similar to making a single contribution into a retirement annuity fund, but you can access your benefit before retirement age as you are allowed to make one withdrawal from the fund (all or part of the amount, but you are taxed on it). Secondly, you do not lose your previous years of service.
If you are nearing retirement age and changing jobs, it may be a better option, tax wise, to retire rather than resign from your fund.
If there is no dire need for a cash payment, your fund benefits should be preserved for their original purpose: financial security in retirement.