If you have a pension or provident fund administered by your employer, you’ve automatically been putting money away towards your retirement each month. But what happens when you leave that job because you’re moving to a different employer, you’re starting your own venture or you’ve been retrenched? Leaving your job affects your retirement savings, so it’s important to understand all the options available to make an informed decision about what to do with your money.
You basically have four options when you leave your employer: you can transfer your savings into a preservation fund; into a retirement annuity (RA); into your new employer’s fund (pension, provident, or RA); or you can withdraw some or all of your savings.
We’ll focus on the two most common options: transferring into a preservation fund and withdrawing.
Preserving your savings
A preservation fund is a type of retirement fund that’s governed by the Pension Funds Act and the Income Tax Act. Its main purpose is to preserve and grow your pension or provident fund money when you leave the employment of a particular company.
You aren’t allowed to make additional contributions towards a preservation fund — rather think of it as a repository for retirement savings from any previous funds. You should still continue contributing towards your retirement savings, though. That’s why, when you start a new position, you’ll start contributing to your new company’s retirement scheme. It’s important to note that the transfer of your retirement savings to a preservation fund is tax-free.
Instead of a preservation fund, you can rather elect to transfer your savings into a retirement annuity, also tax-free, but bear in mind that a retirement annuity is a less flexible investment vehicle than a preservation fund for a variety of reasons.
Withdrawing your savings
The reason that many employers factor a retirement fund into your cost to the company is because saving is crucially important for your financial future. During your working years, you need to put enough money aside to create a steady source of income when you retire, so that you don’t have to rely on family, friends or the state.
For that reason, withdrawing your retirement savings when you leave a job isn’t recommended. But life happens. Maybe you have no other choice — you might need to withdraw your funds to survive. The drawback here, besides the impact on your long-term financial plan, is that you will pay tax if you’re under retirement age. The tax depends on the amount you withdraw and is calculated according to a table. It’s a big decision, so think carefully about your long-term and short-term goals, and maybe seek the advice of a financial planner.
At the end of the day, saving for your retirement is a marathon, not a sprint. There might even be some points along the way where you miss a route marker and go on an unexpected detour. That’s okay. The important thing is that you know how to find your way back to the course.
Changing jobs can be intimidating, but understanding what your savings are for and where they’re going makes the whole process far less stressful.