Having made the decision to preserve your pension benefits on resignation rather than cashing in the money, what are the options open to you?
Apart from the fact that there are a myriad of options, the issue is further complicated by the fact that pension funds often have complicated rules regarding the transfer of pension fund benefits.
I have changed jobs three times during my working career and in each instance the pension fund/human resources department gave me no guidance with regard to the options available to me.
It has only been in recent years that I have realised how bad the lack of advice was.
This seems to be a fairly general impression amongst people who leave companies: there almost seems to be some kind of conspiracy not to inform people what they are really entitled to, especially with regard to the company's contributions to the pension fund.
As I wrote in last week's column, many trustees and actuaries of large pension funds actually bank on a certain percentage of people leaving the company pension fund every year.
This allows the company to take what is known as contribution holidays as the fund is boosted each time someone leaves the fund without taking along the company's contribution.
Apart from leaving your money in an existing fund an option with certain pension funds it is up to the individual members to make a choice between a retirement annuity fund or a preservation fund. While there are certain similarities between these two types of funds, there are also very important differences.
With a retirement annuity the pension benefits are transferred, after tax, into an investment portfolio of one's choice, either with an assurance company or an investment house that allows a unit trust portfolio as the underlying investment.
The asset allocation of the funds is also determined by prudential guidelines which serve to protect the interests of the investor.
Like any retirement annuity, the money remains invested and can be retired at any stage between the ages of 55 and 69 years and 11 months.
At that time one third can be withdrawn, tax-free up to a certain limit, while the remaining two-thirds must be used to purchase an annuity; either a compulsory or living annuity.
What is important to remember is that the money remains locked up until 55, no loans can be made against the retirement annuity while the investment also cannot be ceded or used as collateral. However, it is normally protected from creditors in the case of the annuitant going bankrupt.
In certain cases, pension funds will specify that pension entitlements must be transferred to a retirement annuity, especially when the company's contributions are included.
A preservation pension or provident fund works as follows: the full actuarial value of the departing employee's pension or provident fund is transferred, after tax, to a new fund. All the entitlements and benefits of the employee, like years of service, are preserved and remain with the fund until retirement in terms of the rules of the old fund.
The one major difference, however, is that should the member of the preservation fund need money, it can be withdrawn in case of an emergency. Like any other withdrawal, only the first R1 800 is tax-free. The rest is taxed at the taxpayer's average rate of tax.
The fact that withdrawals can be made from the fund does not appeal to many pension funds and they could specify that money may not be transferred to a preservation fund.
However, given the option, the preservation fund is the best one. Again, people have a choice between an assurance company portfolio or a unit trust portfolio with certain prudential guidelines.
Another major difference is that on retirement, the pensioner will have full access to all the money and does not have to purchase an annuity, but can withdraw the funds, pay the taxes and do whatever with the after-tax proceeds.