Question:
I resigned from the company where I have been working for 26 years. What I should do with my pension fund?

Answer:
Employees staying with employers for such long periods are the exception rather than the rule these days and I am sure you are reaping the rewards with a substantial accumulated value in your pension fund. Before discussing the various options available to you, you need to consider a number of important questions:

• What are your goals in retirement and how will you fund these?

• Are your pension fund savings your only source of retirement provision or do you have other sources (e.g. retirement annuities, an investment portfolio, etc)?

• Do you have substantial outstanding debt that is placing pressure on your lifestyle in the current high interest rate environment?

• How long do you still have to save until you retire?

These are important issues to keep in mind when making decisions that may potentially impact your desired lifestyle now and after retirement.

You should be receiving or would already have received a withdrawal form from your current fund listing the options available to you. The following four options should be reflected:

1. Transfer to pension or provident fund

   If you have taken up new employment and your new employer has a pension or provident fund, you may transfer your pension benefit to your new employer’s fund. Remember that a transfer to a pension fund is entirely tax free. In the case of a transfer to a provident fund, a small portion of the benefit (around R1800) is tax-free and the balance will be taxed according to your average tax rate.

2. Transfer to preservation fund

   It is a good idea to explore the option of transferring your pension benefit to a pension preservation fund. A preservation fund can be considered as a ‘parking bay’ where you can leave your accumulated benefit until you are ready to retire. Upon your retirement, you may access the funds as a retirement benefit subject to its own taxation provisions. It is important to note that a preservation fund allows you to withdraw a portion of your benefit prior to your retirement. The withdrawal amount will be taxed at your average tax rate and a small portion (around R1800) will be tax free. Please note that you are only allowed to make one withdrawal.

3. Transfer to a retirement annuity fund

   A retirement annuity is a voluntary retirement savings vehicle. This means that it is in no way linked to employment and you can choose the contributions you can afford to make on a monthly or annual basis. In the case of a retirement annuity, you will not be able to access your accumulated benefit before the age of 55. There are, however, certain exceptions such as death, disability or emigration. If you have a retirement annuity, you have the option of transferring your pension benefit to your retirement annuity. This transfer will be tax-free. However, unlike with a preservation fund, you are not allowed to make withdrawals from a retirement annuity prior to your retirement.

4. Cash

   Another option is to take the benefit in cash. This will be taxed at your average tax rate and a portion (around R1800) will be tax free. I cannot stress enough that this should be your absolute last resort and should not be considered unless you have substantial outstanding debts. Even if you do have debts that you want to settle now due the current high interest rate environment, you should still rather consider transferring your benefit to a preservation fund and withdrawing only the amount required to settle your debt. Taking the full amount in cash creates an unnecessary temptation to spend the left-over cash. Rather avoid such a temptation by transferring your funds to a vehicle where it is not readily accessible.

As a point of interest, there is draft regulation currently being debated that may in future change the way withdrawal benefits are taxed.

Since I do not know your full situation, it is not possible to accurately advise you on the appropriate course of action. I do, however, suggest that you preserve your accumulated benefit in a preservation fund. This will give you the option of withdrawing a portion of your benefit should an urgent need arise, while preserving the maximum benefit to fund your desired lifestyle in retirement.

Lastly, and more importantly, speak to a Certified Financial Planner who will be able to assist you in determining whether the provision you currently have in place will be enough to sustain your lifestyle goals now and in the future.

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