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What to do with your investments if you are retrenched?

Retrenchment can be an extremely stressful time in any person’s life. Monthly debt payments (house and car payments, medical aid, policies, school fees etc.), do not stop when you are retrenched. However, it is important that you do not panic, but instead speak to a financial advisor to guide you through this trying time. Pension/ provident fund members have some important factors to consider when retrenched, including 1) what to do with the money saved in your pension/ provident fund? and 2) what to do about your group life and disability cover with the company? While the considerations and options available can seem complex, a good financial advisor will be able to assist you in making the various decisions.

Your retrenchment package (for lump-sum benefits) is taxed at the same rate as money taken at retirement – the first R500,000 is tax free, the next R200,000 is taxed at 18%, the next R350,000 at R36,000 plus 27% of taxable income above R700,000. Over R1.05mn is taxed at 36%. This benefit can be used only once in your life – either in retrenchment or at retirement.

If you’ve been employed for many years, you will no doubt have amassed a sizeable sum of money in your pension fund. It is also likely that you will have to leave your ex-employers’ retirement fund. In this case, you’ll be given the option of taking the cash or preserving it in a preservation fund. It is advisable to re-invest this money in an appropriate preservation fund to avoid a large tax bill (and regretting not reinvesting – staying invested allows you to continue to benefit from compounding returns).

In the case of pension or provident funds, there are the following four choices on what to do if you are retrenched. We also highlight the advantages and disadvantages of each option:

  1. Taking the benefit/s in cash after paying the necessary tax (cash lump sum)

The advantage is that you can use the benefit to pay off debt (a bond, car etc.), thereby reducing your monthly expenses. However, there are also disadvantages including the fact that withdrawing retirement benefits mean paying tax. You will also deplete your retirement benefit and may not have enough money to provide for sufficient income or pension at retirement. It is extremely difficult to make back those lost savings.

This option is usually not recommended unless you are in extremely dire financial circumstances.

  1. Transfer funds to a new employer’s pension/ provident fund

The full value of your investment in your pension/ provident fund is transferred, tax-free, from your current fund to your new employer’s fund. Advantages include the full value being preserved until retirement (there is no tax payable on transfer). There should also be no upfront costs incurred in transferring to your fund.

The disadvantages are that you (as a member of the fund), have no control over the future management of the investment transferred and you have no knowledge of how well the funds are being managed or whether the trustees are doing a good job. In addition, the costs on the new fund will be unknown to you and may exceed your old fund costs or the costs on other options where full disclosure of fees is made (i.e. a preservation fund). If you leave the new employer prior to retirement you will have to transfer the fund value again (you cannot access your money unless you resign or retire from your new employer).

  1. Transfer to a pension or provident preservation fund

The full value of your investment in your pension/ provident fund is transferred, tax-free, from the current employer’s fund to a preservation fund in your name. This full value is ultimately preserved for your retirement. You will get the benefit on the growth of the funds that would have been paid over to SARS, should you have chosen an option that incurs a tax liability. You may make one withdrawal from a preservation fund should you ever need the funds prior to retirement (the one withdrawal may be 100% of the fund/s). The tax implications of a pre-retirement withdrawal are worse than a lump-sum on retirement/ retrenchment so careful consideration of your cashflow requirements are necessary. You will have full control of the investment transferred to the preservation fund and may manage the investment portfolios accordingly.

  1. Transfer to an RA

The full value of your investment in the pension/ provident fund is transferred, tax-free, from the current employer’s fund to an RA. The advantages are that the fund value is preserved until retirement age (at 55). You won’t be able to access the money except in the event of death, disability, or formal emigration. You may retire from the RA fund from age 55 regardless of whether you have retired from your employer. The disadvantages include: no withdrawals being allowed unless the fund value is less than R7,000; and up to one-third of the benefit (at retirement) is payable in cash, with the balance being used to purchase a living annuity.

The options and considerations above may appear complex but often there is a clear option, once your needs and unique circumstances have been factored in. Engaging with an informed financial advisor is crucial and Anchor has a team of people ready to assist.

Who can assist you in the event of retrenchment?

Anchor can assist you when you have been retrenched by considering the unique individual needs and circumstances relevant to your situation, and by providing financial advice based on criteria unique to your situation.

Contact us on 011 591 0677 or email us at info@anchorcapital.co.za.



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WEBINAR | The Navigator – Anchor’s Strategy and Asset Allocation, 2Q24

Anchor CEO and Co-CIO Peter Armitage will host the webinar, provide an introduction to current global and local market conditions and give his thoughts on offshore equities. Together with Head of Fixed Income and Co-CIO Nolan Wapenaar, Pete will also discuss Anchor’s strategy and asset allocation for 2Q24, focusing on global equities and bonds. In addition, Fund Manager Liam Hechter will provide insights into local equities, highlighting some investment ideas; Global Equities Analyst James Bennet will discuss Ferrari and give an update on Tesla, and finally, Analyst Thomas Hendricks will participate in a Q&A with Peter, explaining the 10-year US Treasury to attendees.