Very few people join a company when they leave school or university and remain with that firm until retirement some forty years later.
Most people change jobs a number of times during their careers women more so than men but in doing so they destroy valuable retirement benefits that will be greatly missed many years later.
People change jobs for a number of reasons which include promotion and/or better salaries at another company or relocation to another city. Women also change jobs because their husbands have been transferred or they fall pregnant and take a mid-career break.
Many people, I have been told, simply resign in order to get their hands on their pension benefits.
Whatever the reason for job-hopping, the average retiring employee does not even have 20 year's of service with one employer by the time he or she approaches retirement age.
According to Old Mutual 67 per cent of pension fund members over 50 have less than 10 years' service with their employer at the time of retirement.
In addition, more than 30 per cent of pension fund members resign every year while 70 per cent of pension fund members do not stay with one employer for more than three years.
This shocking state of affairs compounds the already grave situation with regard to retirement funding in this country. Not only are people retiring far too soon with far too little money, but they can look forward to a much longer period of retirement.
During Personal Finance's recent countrywide Truth About Retirement seminars, I overheard one comment which described my warning about the future state of retirement as being too gloomy and pessimistic. Call it my mission in life, but perhaps my daily exposure to the reality of underfunded retirement has clouded my perception. And one of the major reasons for this underfunding is the widespread job-hopping that takes place at great cost to the member.
Sometimes the damage is done because the employee is ignorant of the options available when one resigns from a company, but in certain cases the damage is a deliberate act on the part of a pension fund.
In fact, actuaries of many defined benefit pension funds welcome job-hopping and build in assumptions with regard to how many contributing members will leave the employ of a company to the benefit of members who stay as well as the benefit of the company which has to fund the pension fund.
In terms of the rules of many pension funds, a departing employee will only be entitled to his or her contributions to the fund plus a nominal interest factor. The company's contribution stays and swells the actuarial reserve of the fund for the benefit of employees who remain in the fund. Ultimately, this allows the company to take contribution holidays. Although the level of knowledge with regard to pension fund matters has increased substantially in recent years, many job-hoppers still do not fully understand their rights and options with regard to their benefits.
If at all possible, try and avoid the trap of withdrawing the benefits when you change jobs. Not only do you lose the company's contributions, but the taxman will also take a substantial slice of any benefit.
Withdrawals from a pension fund are deemed to be income and are added to your taxable income in any given year.
There are several options if you choose to preserve the full actuarial benefit of your pension fund. They are: remaining with the existing fund, transferring to the pension fund of the new company or placing the money into either a retirement annuity or a preservation fund.
Each one of these options will preserve the benefits of your retirement fund and will depending on the rules of the various legal structures, allow you to make withdrawals from these funds at an appropriate time.
The eventual choice depends on a number of factors. An increasing number of people transfer their benefits to either a retirement annuity or a preservation fund where direct control over the investment management can be exercised.
Although there are many similarities between retirement annuities and preservation funds, there are also important differences. This will be discussed in greater detail in next week's column.