Thandi Ngwane, Head of Strategic Markets, Allan Gray
Don't take your retirement money and run if you are changing jobs; rather think long-term and continue saving towards your retirement. But what are your options? When you leave your employer, you can transfer your retirement savings into a preservation fund or a retirement annuity (RA).
A preservation fund allows you to preserve and grow your savings until you retire. If you have been contributing to a pension fund, you will transfer your money into a pension preservation fund. If you’ve been contributing to a provident fund, you will transfer your money to a provident preservation fund.
You won’t be able to add money to your preservation fund, but at least what you have contributed so far will be safe and will continue to grow depending on how it is invested.
Access to your money
Once you are a member of a preservation fund, you may make one withdrawal before you retire. When you retire, you can take up to one-third of your money as cash from a pension preservation fund. With the rest, you have to buy a product that gives you a monthly income such as a living annuity or a guaranteed life annuity, unless you are in a provident preservation fund, in which case you can withdraw all of your money as cash.
In many instances, you will have some measure of choice as to where you money is invested. There is normally a selection of unit trusts to choose from, depending on the company offering the preservation fund.
Retirement annuities (RAs)
You can also transfer your pension or provident fund to an RA when you leave your employer (if the rules of your fund allow). Unlike preservation funds, RAs allow you to continue making contribution to your savings. A portion of your contributions is tax deductible.
Discipline, flexibility and freedom
While you can only cash in your RA when you retire, some RAs allow you to switch between the underlying investments at any time, and stop and start contributions without any penalties. And if you change jobs, your retirement annuity continues without any need to transfer your savings.
RAs are a tax-efficient way to save for your future as a portion of your monthly contributions is tax deductible. Once you retire, you won’t have to pay any tax on the portion of your RA that you transfer to a living or a life annuity. However, once you start to receive a monthly income from your annuity, that income is taxed at your marginal tax rate. The cash portion that you take from your RA at retirement is taxed. For more information on saving for retirement, visit www.allangray.co.za/investingexplained/ Do you have any investment-related topics? Send an email to email@example.com and we’ll do our best to deal with popular themes in this column.
Allan Gray Proprietary Limited is an authorised financial services provider.