When leaving an occupational retirement fund - whether due to resignation, retrenchment or the closing of the fund - you have two options when it comes to your accumulated retirement savings. The first of these is cashing in.
However, if you choose to withdraw the money you've saved thus far, you'll receive a relatively small portion tax free, but will be taxed on the rest of it at the rate then applicable by SARS. This means that your savings pool is depleted, that a fair chunk of it has gone to the taxman, and that you have to start saving for retirement from scratch. The decision is irreversible.
Alternatively, you could choose to preserve your savings. If following this course of action, your savings will be transferred into a preservation pension fund (if originally transferring from an occupational pension fund) or a preservation provident fund (if originally transferring from an occupational provident fund) for reinvestment - without incurring any tax.
This means that you continue to benefit from compound growth, where future returns are earned on the total value of your investment, including your initial investment amount and all the returns you've previously generated as well. You will avoid any tax implication (and will only be taxed upon your retirement), which means that you can earn compounded returns on the full value of your current savings amount.
Upon retiring from a preservation pension fund, such as the PPS Preservation Pension Fund, a maximum of one-third of your retirement proceeds may be taken as a cash lump sum, a portion of which is tax free (currently the first R315 000). The remaining two-thirds of your capital needs to be utilised to purchase post-retirement income from a registered insurer. However, a preservation provident fund, such as PPS Preservation Provident Fund, has no prescribed codicil relating to the purchase of an annuity. The full value of your retirement proceeds may, thus, be taken as a cash lump sum, of which the first R315 000 is currently tax free.
If you're thinking of changing employment in future, try to resist the temptation to tap into your retirement savings when doing so and consider investing in a suitable preservation fund instead. If you've changed employment in the past and already have one or more preservation funds in place, it may be worth considering whether you can lower the fees you're paying by transferring to a more cost-effective fund. Remember that even a small reduction in fees could have a significant impact on the ultimate value of your investment.
The importance of preserving your retirement savings in a cost-efficient portfolio becomes especially evident when considering industry statistics. Unfortunately, the numbers don't look good. A recent survey by Alexander Forbes shows how ill-prepared South African retirement fund members really are.
In fact, it is estimated that only 26% of retirement fund members will reach retirement financially secure. To do so, one has to save at least 13 cents of every rand ever earned, while most retirement fund members only contribute between five and six cents. To make matters worse, fund members have an average contribution period of 27 years and six months, while most careers span over 40 to 45 years.
Remember that a failure to preserve accumulated retirement savings means that you have to start saving from scratch - and now have less time to save. So when thinking of changing employment, keep in mind that consistent, contractual saving throughout your career is the best way to save towards a secure retirement. Also consult your intermediary and evaluate the fee structure of existing preservation funds, in ensuring that your investment offers you a flexible and cost-efficient portfolio.
