Pension and Retirement Planning

The days of people remaining with one employer for life are over. Nowadays people change jobs many times during their careers. However what many fail to realise is how many loose ends they need to tie up when changing employers.

One of the most important items on your “to do” list when changing jobs is your exit from your company retirement fund. Unfortunately many people tend to place this at the bottom of the list or overlook it entirely.

This is unwise as the retirement fund investment value often makes up the bulk of a person’s financial wealth!

If you are planning to resign from your present position, contact your financial planner as soon as possible. He or she can advise on the structure of your new pay package, and help you access cash from your portfolio while you are between jobs. Most importantly, they can advise you on what to do with your old retirement fund benefits.

On exiting your company retirement fund you have four options.

Take the Cash
Extra cash is always welcome, but in the case of pension and retirement funds this is not a good idea. Firstly, you will then be tempted to spend your hard-earned retirement savings. Secondly, the cash withdrawal will also be taxed at your average tax rate which may be close to 40% depending on your taxable income. Waiting till retirement age could save you a lot in tax.

Transfering to Retirement Annuity Fund
The retirement annuity option is inflexible as you cannot access the funds until age 55. This limits your options later in life, especially if you emigrate.

Transfering to a Preservation Fund vehicle
This is what most people elect to do. Preservation fund vehicles are an excellent solution to preserving your pension savings until retirement.

The transfer is tax-free. A preservation fund vehicle also offers flexibility as you are entitled to make a withdrawal from the preservation fund prior to your retirement. This could be useful should you have a severe financial emergency or decide to emigrate.

It is important that you and your planner make the correct decision as to the underlying investment within the preservation fund as a poor investment selection may have dire consequences for your long-term financial health.

Contact your planner at least a few weeks before you leave your old employer. Failure to do so may compromise your preservation fund investment options. By law, you may use only the preservation funds of which your ex-employer is registered as a “participating employer”. This requirement must be satisfied before your last day of work. Contact your financial planner at least a few weeks before your last day at the office and it should still be possible to arrange for your existing employer’s registration in the preservation fund of choice.
Most people leave this too late are left with unappealing choices.

Transfering the the new employer's fund
This is the default for many people, but they put off the paperwork involved in making the transfer. Making a late decision, or no decision, as to your retirement savings is a mistake.
If you have not transferred your pension or retirement fund money into a preservation fund, or a retirement annuity, within six months of your date of exit, the Receiver of Revenue will knock off 30% in income tax.
Getting this reversed can be a painful and lengthy exercise.

Related Group Benefits
You may be able to convert your group life and disability cover on your pension fund into an individual policy without medical underwriting. This could be a valuable benefit if you have health problems and are unlikely to obtain the cover in your personal capacity. If your new employer does not have a retirement fund with group risk benefits you should give serious consideration to converting your existing cover – your family needs it.

Most funds give you only 30 days after exit to take up the conversion option – again, it’s a case of “you snooze, you lose”.

Ian Beere, CA(SA) CFP is a financial planner and partner at Netto Financial Services and was awarded the Financial Planner of the Year in 2007. His partner Debbie Netto-Jonker was awarded the Financial Planner of the Year in 2001.