The p-word

CityPress - - Business - – Maya Fisher-French

A re­cent dis­cus­sion with a 30-some­thing-year-old who had moved to a new com­pany re­vealed that he had been forced to cash in his pen­sion fund even though he wanted to pre­serve the money.

The lack of co­op­er­a­tion by his for­mer em­ployer had made it just too dif­fi­cult. He was fur­ther con­founded by find­ing the ap­pro­pri­ate in­vest­ment ve­hi­cles for his funds.

So cash­ing in, pay­ing the tax and trans­fer­ring the money into his bond was just eas­ier. Un­for­tu­nately, the long-term im­pact to his re­tire­ment sav­ings will be sig­nif­i­cant, re­duc­ing his pen­sion in­come by about a third.

It is ex­actly this sce­nario the Trea­sury is hop­ing to ad­dress with its new pro­pos­als.

While an em­ployee now needs to re­ceive fi­nan­cial ad­vice to pre­serve their funds, un­der the new pro­pos­als they would be re­quired to re­ceive ad­vice be­fore cash­ing their pol­icy in, en­sur­ing they fully un­der­stand the long-term im­pli­ca­tion of their de­ci­sion.

Fur­ther­more, by in­sist­ing that the for­mer em­ployer pro­vide a paid-up cer­tifi­cate that the new em­ployer is obliged to re­quest from the new em­ployee, the onus will be on the em­ployer to as­sist the em­ployee to pre­serve the funds. It will also make it eas­ier for in­di­vid­u­als to con­sol­i­date their funds and pre­vent the cur­rent sit­u­a­tion where they have mul­ti­ple preser­va­tion funds, in­cur­ring high costs and fur­ther ad­min­is­tra­tion fees.

From an em­ployer’s per­spec­tive, the amount of up­heaval to meet these re­quire­ments will de­pend on the fund struc­ture. Em­ploy­ers who use um­brella funds, which pool the re­tire­ment in­vest­ments of mul­ti­ple em­ploy­ers, may find that the de­fault preser­va­tion struc­ture is al­ready in place. For em­ploy­ers with stand-alone funds, changes to the fund rules would need to be made.

Cur­rently, depend­ing on which fund you speak to, the rate of preser­va­tion is about 10% to 30% – the younger the em­ployee is, the more likely they are to cash in their re­tire­ment fund. In its ear­lier pa­pers, the Trea­sury in­di­cated that it would wait to see the out­come of in­cen­tives to pre­serve re­tire­ment funds be­fore con­sid­er­ing com­pul­sory preser­va­tion.

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