How to reinvest your pension fund wisely
CHOOSING to leave a job is a tough decision, but being retrenched is even worse.
Retrenchment is usually a long and emotional process where you must make life-changing choices.
Arno Loots, head of Umbrella Fund Solutions of Liberty life, says the most important thing for employees to think about is their retirement fund.
Speaking to Consumer Line this week, he said some people do not know whether to withdraw their pension funds or invest it in another savings product. People often do not know the tax implications for whatever decision they may make.
He said employees have four options to consider when leaving employment. They may either withdraw the funds as a lump sum; transfer funds to a new employer’s pension or provident fund; transfer funds to an alternative pension or provident preservation fund; or consider an alternative retirement annuity fund.
The first option is not advisable, as you will pay tax, Loots said, advising employees to check the tax liability they would incur on the SARS website.
He said employees must always bear in mind that tax relief on lump sum benefits applies only once in a lifetime.
“If you have claimed it once, you cannot claim it again.”
He said there was also the loss of future money that you will suffer if you prematurely withdraw your pension funds.
In the simplest terms, the money in your pension fund is a pot that grows every month, Loots said.
This growth is a combination of your monthly contribution and the compound interest this money accrues from the underlying investments made on your behalf by a fund solutions provider.
“The longer this money is allowed to grow in this retirement pot, the more interest it gains,” said Loots.
Over time, this interest also starts earning interest, compounding the growth on your initial investment, he said.
The other options are tax free, and by transferring your money to your new employer’s retirement fund or an umbrella fund and keeping it in place, you will fully benefit from the effect of compound interest, he said.
“The benefit of transferring retirement umbrella funds or your employer’s retirement fund is that you potentially pay lower group fees in comparison to preservation or retirement annuity funds, which are designed for individuals,” Loots added.
By transferring to your new employer’s pension fund or staying in your current fund, neither you nor your creditors can access your retirement fund, he said.
However, there are exceptions to this.
If there is a case of fraud or theft against you by your previous employer, then they are legally entitled to lay a claim to recover what is owed to them, Loots said.
He said the fund will not pay out any money to the employer until there is either an admission of guilt by the employee or an official court determination.
If unsure about the options available when you leave your job, you can speak to the HR representative in your company or the person responsible for your retirement fund. Alternatively, speak to a qualified financial advisor.