How does changing jobs affect your retirement planning?

Question:

What are the implications of changing jobs/employment with respect to your retirement fund?

Answer:

Khomotso,

There are many implications. Mainly, you need to consider what you will do with the money in the retirement fund offered by your current employer. You have a number of options.

1. You can cash in your retirement fund. This is not the prudent option, as this money is earmarked for your retirement, not to pay off debt or raise your current standard of living. This money will be taxed as per the lump sum tax tables. Essentially the first R22 500 will be tax free, the balance up to R600 000 will be taxed at 18%, the balance to R900 000 at 27%, and the rest at 36%. The retirement (rather than withdrawal) lump sum tax tables are more favourable, so it will save you tax, not to cash in early.
2. You can preserve a part, or your entire retirement fund in a preservation fund. You will pay no tax on transfer, and the income earned by the fund will also not be taxed. You can make one full or partial withdrawal from the fund at any time, subject to the withdrawal lump sum tax table above. You can retire from the preservation fund from age 55 onwards. You cannot contribute to a preservation fund.
3. You can transfer the proceeds tax free to your new employer’s retirement fund, if there is one, with one exception – you cannot transfer your existing pension fund to a provident fund.
4. If you plan to become self-employed, and wish to continue contributing, you can also transfer the fund across to a retirement annuity.
   Other factors you need to consider:

    

   1. If your new employer does not offer a retirement fund, you will have to consider saving in your own name, possibly through a low-cost, tax-incentivised retirement annuity.
   2. If your new employer does offer a retirement fund, and you are eligible to join, then you are required by law to join that fund. You will have to assess whether the contribution rate at your new employer is appropriate. You should strive to save at least 15% of income.
   3. If your new employer offers investment choice, you must ensure that your asset allocation is appropriate for your age (not your personal risk tolerance).

In deciding between options 2, 3 and 4, you need to compare fees (very important), investment styles and asset allocation strategies, and ensure they are right for you. You will find a lot of material on our web site, providing you with the necessary information on your retirement savings and changing jobs, not least of all in our blogs.