Your monthly payslip comes in, you see something along the lines of employee contribution or employer contribution and you might feel a sense of relief that you are in fact making provision for retirement. You forget about it, until the next month. In a stable work environment this cycle might go on for years, but unfortunately life is not linear.
Within the context of pedestrian economic growth and ever disruptive technological applications, companies struggle and employees are retrenched. Some employees might negotiate their way to a different employer, while some might face the un-expected axe from their employers. Either way, a crucial decision needs to be made by you, the employee: What do I do with my Pension/Provident Fund savings?
With your hard-earned and accumulated savings pot, you have 3 broad options:
1. PRESERVE. This can be done in your personal capacity, where your savings remains invested in your choice of assets for retirement provision. Your two product choices area:
- a Preservation Fund where you still have access to a (taxable) once-off withdrawal during your lifetime regardless of employment status; and
- a Retirement Annuity where you only have access to one-third of the (taxable) capital after age 55, where the remaining two-thirds buys an income generating product. More on that here:
2. TRANSFER. This would be applicable only if you have successfully negotiated a new working relationship with a company who offers Pension/Provident benefits who are able to receive your accumulated savings. You then ‘forego’ any opportunity to access capital until you are retrenched/retired by that specific employer.
3. CASH-OUT. Yes, you are able to access some (or all) of your accumulated savings, but these are taxed according to the following scale, applicable to the tax year ending 28 Feb 2017:
It is extremely important to remember that this scale is not only applicable to your current employer’s fund, but it is applied throughout your life. If you made a second withdrawal down the line, the tax payable will take into account your previous withdrawals. Your tax free capital amount available at retirement (currently R500k) will also be reduced by any previous withdrawals.
You need to make an informed decision
We often find individuals who (by default) opt for the Cash option, without taking full stock of the consequences of their actions. We would often here things like: “I’d like to take the cash and invest it for my retirement.” In our view, that would be like deliberately choosing a toll road (and paying the tax) when an alternative road of equal length and zero penalty was available.
Your Greatest Enemy
By taking the cash option, you are rewarding your present-self by penalizing your future-self. We are aware that humans are programmed to prefer short-term gratification over long-term satisfaction, and by incorporating this into our advice we intend to protect yourself from yourself. You might not feel the long term-consequences of your actions today, but when you eventually do it is usually too late.
Are you at a point where you need independent advice regarding your Pension/Provident fund? Talk to us at info@ternary.co.za today!
