When it comes to retirement fund benefits, members have some important points to consider when they resign or are retrenched. These include:
- What do you do with the money saved in your pension/provident fund?
- What do you do about the group life and disability cover you have with your company?
There are five choices on what to do with the money saved in the pension or provident fund:
- Take the benefits in cash after paying the tax.
- Move to the new employer’s pension or provident fund.
- Move to a pension or provident preservation fund.
- Move to a retirement annuity (RA).
- Remain invested in the existing company fund.
There are also important considerations about the group risk benefits:
- Group life cover.
- Disability cover.
- Other benefits.
- Continuation options.
Pension/provident fund options
Taking the benefit in cash
If the benefit is taken in cash, the first R27,500 is tax-free (unless taken previously), and the balance is taxed according to the withdrawal tax table.
Advantages
i. You may use the benefit to pay off debt. (e.g., a bond, car)
ii. You can reinvest the money at your discretion in a voluntary/flexible investment vehicle.
Disadvantages
i. Retirement benefit is taxable in the member’s hands.
If you have R700,000 and pay 18% tax, you will have R575,000. To get back to R700,000 (where you started), you will need a return of R125,000.
ii. The member will deplete their retirement benefit, and they may not have enough money to provide them with sufficient income at retirement.
The Effect of NOT Preserving Your Retirement Benefits when Changing Jobs:
A 20-year-old who saves 12% of their salary for retirement.
At age 60 … they will have 75% of their salary as retirement income.
The same member resigns at age 30, spends the money… and STARTS SAVING AGAIN at the same rate…at age 60…. they will only have 44% of their salary as retirement income.
iii. It is difficult to make back those lost savings. For every R100,000 you take out and spend, you will need to save R2,130 per month for five years at a 10% return to get back to where you were.
This is not recommended unless the fund value is extremely low.
Transferring to the new employer’s pension or provident fund.
The fund value is transferred tax-free from the current fund to the new employer’s fund.
Advantages
i. The fund value is preserved until retirement.
ii. No tax is payable on transfer.
iii. No costs should be incurred in transferring to your fund.
Disadvantages
i. The member does not have control over the future management of the funds transferred.
ii. If the member leaves the new employer before retirement, they will have to transfer the fund value again.
iii. You cannot access your benefit unless you withdraw or retire from your new employer.
Transferring to an RA
The member may transfer their fund value tax-free from the current employer’s retirement fund to a RA.
Advantages
i. The fund value is preserved until retirement.
ii. The fund transfer is tax-free.
iii. You may retire from the retirement annuity fund from the age of 55, regardless of whether you have retired from the service of your employer.
Disadvantages
i. No withdrawals are allowed.
ii. Up to one-third of the benefit at retirement from the RA is payable in cash. The balance of the fund value must be used to purchase an annuity. Consequently, it is not recommended that the proceeds of a provident fund be transferred into a RA.
Transferring to a Preservation Fund
The fund value is transferred tax-free from the current employer’s fund to a participating preservation fund in the member’s name.
Advantages
i. No transfer tax is payable, and the fund value is preserved for ultimate retirement.
ii. The member may take one withdrawal from the preservation fund should they ever need the funds. This one withdrawal may be 100% of the funds. If the benefit is taken in cash, the first R25,000 is tax-free (unless taken previously), and the balance is taxed according to the withdrawal table.
Note: Any lump sum withdrawal when transferring to the preservation fund may constitute one withdrawal. This includes indebtedness to the employer repaid by members on such transfer.
iii. The member can have complete control of their investment transferred to the preservation fund and may manage the investment portfolios accordingly.
Disadvantages
i. It could be said that having the facility to access some or all of the funds as a once-off withdrawal is a disadvantage because the fund value will be reduced before retirement.
Remain within the company fund
Exiting staff have the option of remaining within the company retirement fund.
Advantages
i. No transfer is required.
ii. The underlying investment and investment choice is unchanged.
Disadvantages
i. The member is still bound to the same investment choice and management of the retirement fund as when they were an employee.
ii. Less direct control over the investment.
Group risk benefits
The pension or provident fund is very likely to have additional risk benefits that may change significantly when you leave your current company. Group benefits can be divided into three broad categories and other ancillary benefits that will cease to cover you when you leave.
Death benefit/life cover – this is usually a lump sum paid out on death calculated as a multiple of your annual basic salary (i.e., three times your annual salary). There are some other variations, such as spouses and children’s benefits, but these are not very common.
Disability cover – there are two types of cover
i. Income disability – this pays out a benefit for temporary or permanent disability. It is usually calculated as a percentage of your basic salary, payable after a specified waiting period and is payable until recovery or retirement age. (i.e., 75% of your basic salary payable after a three-month waiting period until the maximum age of 65).
ii. Capital disability – a lump-sum payout in the event of a permanent occupational disability also based on a multiple of your annual basic salary.
Income disability cover is a vastly superior product and a critical benefit for most employees because of the potentially larger payout. (i.e., a 40-year disabled employee earning R120,000 would get the following payouts assuming retirement age is 65)
Income disability – R90,000 p.a. until age 65 – c. R27,000,000.
Capital disability – three times R120,000 = R360,000
Dread disease/severe illness benefit – this is a fairly rare benefit. This is also usually a lump sum payout for certain severe illnesses. (i.e., cancer/heart attacks/strokes, etc.)
Other ancillary benefits that may be part of the benefits include:
i. Funeral cover.
Continuation option
Many people have health problems and cannot obtain insurance. It is advisable that they check whether a continuation option is available on the scheme to take over the cover in their personal capacity. They would need to know the following:
- Is there such an option available?
- Who is the insurer?
- They would then have to option a specific personal quote – which is based on age/income/education/occupation and smoking status.
The only medical proof usually required is a clear HIV test.
It is advisable to check exactly what benefits are in place on your current scheme and what the benefits may be on a new one. Every scheme has different benefits. It is then advisable to check how the changes affect you and your family. You should consult a financial advisor about the changes.
