Leaving your employers fund?
It’s all about making the right choices
How rewarding your life after retirement is depends on how well you plan and make provision for it now. If you are leaving your employer’s fund due to resignation, retrenchment, or the winding up of your retirement fund it is essential that you preserve your current retirement savings. Perhaps you are retiring soon? If so, you’ll need a plan that will help you grow your capital and provide a level of income that enables you to maintain your current standard of living. On leaving your employer’s fund you have a number of choices.
Options before retirement
Transferring your benefit to a preservation fund
It’s important to look after your current retirement capital, without dipping into your savings for expenses before you retire. You can do this with a preservation fund, such as our Investec iSelect Preservation Fund. This allows you to transfer your benefit should you resign, and helps you stay on track for retirement in the event of retrenchment, dismissal, or the winding up of your employer’s retirement fund. No tax is payable on transfer. You may make one withdrawal up to the full value of the preservation fund before retirement.*
*Where the source of funds is the Government Employees Pension Fund, the withdrawal will be limited to one-third of the value.
Transferring your benefit to a retirement annuity
On leaving an employer’s fund, most members choose to transfer their benefit to a preservation fund but you also have the option to invest in a retirement annuity, such as our Investec iSelect Retirement Annuity. No tax is payable on transfer. You may not make any withdrawals from the fund before retirement.
Transferring your benefit to a new employer’s fund
If you are moving to another company you may have the option to join your new employer’s fund. No tax is payable on transfer if you move from a provident fund to a provident or pension fund. However, if you move from a pension fund to a provident fund, tax is payable on transfer. In this instance you could consider rather transferring your benefit to a preservation fund such as our InvestecFunds Preservation Fund as no tax would be payable on transfer.
Taking your benefit in cash
You may be tempted to cash in your retirement benefit and buy that car you’ve always wanted or go on an exotic island holiday. Generally, it is not a good idea to give into this spending urge. Not only will the tax man make you pay for this “privilege” you’ll also build up less capital for your retirement. The tax payable depends on the cash amount as well as your average tax rate.
Options on retirement
Taking your benefit in cash
On retiring from a provident fund you could choose to have the full value of your benefit paid out in cash. If you retire from a pension fund you may receive up to one third as a lump sum. You may be tempted to use some cash from your retirement to purchase your dream house at the coast, travel the world or even start your own business. Generally, it is not prudent to use your retirement nest egg for anything other than retirement. Not only will the tax man make you pay for this “privilege” you may also outlive your capital and not enjoy the retirement you’ve always dreamt of having. The tax payable on the lump sum will depend on the amount and your salary/income in the year of retirement or the preceding year.
Transferring your benefit to an annuity e.g. a living annuity
You can make your savings work for you after retirement by investing in a living annuity like the Investec iSelect Living Annuity. A living annuity is suitable for investors who wish to preserve their capital and require dependable returns in excess of inflation. You could purchase a living annuity with the full value of your benefit at retirement or you could use part thereof. Pension fund members need to transfer at least two-thirds of their retirement benefit to an annuity. You don’t pay any tax on transferring your benefit to an annuity. However, income from your living annuity will be included in your gross income for the year and will be taxed at your marginal rate.