What you should know about preservation funds and other factors that should consider when leaving your employer.
When it comes to investing, in many cases true success rather lies in essentially doing “nothing” rather than stressing too much about what we should be doing. The true value of inaction can be best displayed when it comes to preserving your investments.
When we change employment, the temptation is always there to access your retirement funds, as the documentation is often provided as a matter of course. This is especially true when we are still younger and can easily believe the fund value is still minor, and that withdrawing our savings won’t have a longer-term effect.
The power of preservation proves otherwise and just benefiting from time, and compound interest, can have a life-changing effect. The average person will change jobs around 12 times in their lifetime (according to a 2019 US Bureau of Labor Statistics survey of baby boomers). This is even more reason to reinvest your retirement funds every time you make a life change.
The preservation fund is a personal retirement savings vehicle. Preservation funds provide the flexibility of enabling you one withdrawal prior to retirement age of the full benefit, subject to income tax at the lump sum withdrawal tax rate. If a partial withdrawal is made, the balance of the benefits remain in the fund until retirement age (which is 55 years). No on-going contributions may be made to the preservation fund.
Your selection of underlying investments will have to comply with the limits set by regulation 28 of the Pension Funds Act. Regulation 28 sets out limitations imposed by the government to prevent investors from taking too much risk with their retirement savings. Various asset limitations include 75% equity exposure, 40% foreign exposure (inclusive of 10% in the rest of Africa), 30% foreign exposure (excluding the 10% allocation to the rest of Africa) and a 25% maximum property exposure.
The diagram below illustrates how reinvesting your funds when changing occupations, could lead to a three times larger outcome at retirement, compared to making withdrawals on these employer changes – every time you are essentially starting over, but with a shorter investment term to retirement. For that reason, you need to start playing catchup – but from an affordability and cash flow basis, this is in many ways physically impossible.
There are a few other essential decisions that need to be actioned when you leave an employer, depending of course on which benefits your company offered. Actioning these decisions from your side is therefore imperative so that you aren’t left without cover.
Firstly, your medical aid contributions need to be changed over to your personal bank account, should your medical aid be structured through the employer and if you are not joining a new employer’s fund. Ensure this is done immediately.
Secondly, consider a continuation option should your company offer risk benefits (life cover, severe illness cover, disability cover and income protection – sometimes even an education benefit and funeral cover is included here). In most cases you will have the option of keeping this cover. Taking this cover into your personal capacity is called a continuation option, and you may not have to go through any medical underwriting in certain instances. You are normally covered for 30 days, depending on the rules of the policy. So, structuring this as soon as your last day contractually is important, to ensure you are not left without cover.
Leaving an employer is sometimes a much bigger life-event we give it credit for – your portfolio will require holistic restructuring, and this is best done sooner rather than later.
Elke Brink is a wealth advisor at PSG Wealth.