Sandy van der Zanden, a wealth manager at Anchor Capital, discusses the options available to members of a company retirement fund on resignation or retrenchment, including what to do with the money saved in their pension or provident fund and the group life and disability cover they have with their company.
If you belong to a company retirement fund, you have some important points to consider when you resign or are retrenched. These include:
- What do you do with the money saved in your pension or 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) fund.
- Remain invested in the existing company fund.
There are also important considerations about the group risk benefits: group life cover, disability cover, other benefits, and continuation options.
PENSION OR PROVIDENT FUND OPTIONS
Take the benefit in cash
If you take the benefit in cash, the first R27 500 is tax-free (unless taken previously), and the balance is taxed according to the withdrawal tax table.
Advantages
- You can use the benefit to pay off debt.
- You can reinvest the money at your discretion in a voluntary or flexible investment vehicle.
Disadvantages
- The retirement benefit is taxable in your For example, if you withdraw R700 000 and pay tax at 18%, you will have R575 000. To get back to R700000, you will need a return of R125 000.
- You will deplete your retirement benefit, and you may not have enough money to provide you with sufficient income at retirement.
The following example illustrates the effect of not preserving your retirement benefit when changing jobs:
- A 20-year-old who saves 12% of his salary for retirement will have 75% of his salary as retirement income at the age of 60.
- If the same member resigns at age 30, spends the money and starts saving again at the same rate, he will have only 44% of his salary as retirement income at age 60.
It is difficult to make back lost savings. For every R100 000 you take out and spend, you will need to save R2 130 a month for five years at a 10% return to get back to where you were.
Taking the benefit as cash is not recommended unless the fund value is extremely low.
Transfer 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
- The fund value is preserved until retirement.
- No tax is payable on transfer.
- No costs should be incurred in transferring to your fund.
Disadvantages
- You do not have control over the future management of the funds transferred.
- If you leave the new employer before retirement, you will have to transfer the fund value again.
- You cannot access your benefit unless you withdraw or retire from your new employer.
Transfer to an RA
You may transfer your fund value tax-free from the current employer’s retirement fund to a RA.
Advantages
- The fund value is preserved until retirement.
- The fund transfer is tax-free.
- You may retire from the RA fund from the age of 55, regardless of whether you have retired from the service of your employer.
Disadvantages
- No withdrawals are allowed.
- 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 are transferred into a RA.
Transfer 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
- No transfer tax is payable, and the fund value is preserved for retirement.
- You may take one withdrawal from the preservation fund if you 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.
- You can have complete control of your investment transferred to the preservation fund and may manage the investment portfolios accordingly.
Disadvantage
- It could be said that having the facility to access some or all 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
- No transfer is required.
- The underlying investment and investment choice is unchanged.
Disadvantages
- You are bound to the same investment choice and management of the retirement fund as when you were an employee.
- Less direct control over the investment.
GROUP RISK BENEFITS
The pension or provident fund is 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 (for example, three times your annual salary). There are some other variations, such as spouses and children’s benefits, but these are not common.
- Disability cover
There are two types of cover:
- Income disability, which 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 (for example, 75% of your basic salary payable after a three-month waiting period until the maximum age of 65).
- Capital disability, which is 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. For example, a 40-year disabled employee earning R120 000 would receive the following payouts assuming the retirement age is 65:
- Income disability: R90 000 a year until the age of 65 – about R27000
- Capital disability: three times R120 000 (R360000).
- Dread disease/severe illness benefit
This is a rare benefit. It is usually a lump-sum payout for certain severe illnesses (cancer, heart attacks, strokes).
Other benefits
Ancillary benefits that may be part of the benefits include 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 such an option available?
- Who is the insurer?
They would 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 adviser about the changes.
This article was first published by Anchor Capital and reproduced with permission.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article does not constitute estate or financial planning advice that is appropriate for every individual’s needs and circumstances.
