Leaving a job? Tips on managing your retirement benefit

It’s the beginning of a new year, and many people may be considering making a fresh start in their careers, switching jobs or trying to move up the career ladder. If you decide to hand in your resignation, for whatever reason, it can be difficult to know what to do with your retirement savings you’ve built up through contributing to your (now former) employer’s pension or provident fund.

The two most popular options are to either cash out the funds, or reinvest them. The latter involves transfer to a preservation fund, which is an investment vehicle that keeps all your savings intact. One huge benefit of the latter choice is that you don’t incur any tax on the transfer, and your money continues to compound tax-free until you eventually retire and begin to draw down funds from it.  You’ll be taking this separate retirement fund with you, to go alongside the new one you’ll hopefully have with your next employer.

Keep your eyes on the prize

While these two choices appear pretty simple, it’s often at this point where the internal battle between your head and your heart begins… should you take the money and run, or should you resist and continue investing in your future? 

In challenging economic times such as these, there tends to be a greater pull towards an attitude of ‘you only live once’ (YOLO), and depending on how long you’ve been working, and how much you’ve contributed, there could be a significant amount of cash sitting in your retirement fund. It may be hugely appealing to take the money and use it for things like paying down debt or for upgrading your home or splashing out on a bucket-list overseas holiday. But if you speak to your financial adviser, they’ll be sure to urge caution, and for you to show some restraint.

Numerous studies have indicated that most of South African retirement fund members simply do not have sufficient savings when they retire. This is predominantly because members aren’t saving enough, which is only exacerbated when they choose against preserving their retirement benefit after changing jobs. And while the cash might be extremely tempting, once SARS takes their hefty piece of your pie (which happens immediately, to discourage members from this kind of behaviour), you’re more than likely to end up with much less money than you were anticipating.

If you’re thinking you could simply “catch up” on your retirement savings by contributing more at a later stage, again you may be in for a nasty surprise. Not only is the value of your retirement cash eaten into by taxes (as mentioned above), but you also lose out on the chance for it to compound over time. This means you’ll be forced to contribute much more than what you took out, just to break even. Using our retirement fund calculator you can  see exactly how a few thousand rands can significantly impact your long-term retirement goals.   

A final consideration regarding tax is that, if you cash out your retirement fund mid-career, rather than drawing it down in retirement, your tax rate is likely to be higher for the former option because you are likely to be earning more income at the time compared to in retirement.

It's a big decision to change your job, and you’ll need to keep a clear head as you navigate your journey to ensure that you stay on course towards achieving your long-term goals. An independent financial adviser can help you make the most suitable decision based on your unique circumstances, including your risk appetite, time horizon, and individual aspirations. 

To conclude, a top priority when you are leaving or changing your job is to manage your retirement benefits correctly. Most of the time, it’s better to re-invest your retirement benefits directly into a preservation fund. And if the urge to take the cash starts to pull on those heart strings, just remember that a lump-sum payment could potentially be a valuable part of your existing investment strategy. We don’t suggest you sacrifice your long-term well-being for a short-term gain.

For more information, please contact our Client Services Team on 0860 105 775 or email us at info@mandg.co.za.