Ngoako asks: I have received an offer for a new job recently. I have saved just under R300 000 in a retirement fund with my current employer.
I would like to know what one should do with these funds. What are my options with regard to investments or any method of safeguarding the funds for future use?
Maya replies: The most important decision you make is not to cash in this money. These funds form the basis of your retirement plan.
I recently saw some interesting figures from Liberty which showed that even just the smallest withdrawal from your funds has a significant impact on your retirement.
For example if you put away R2 000 a month into your retirement fund and you now decided to take advantage of your R22 500 tax-free portion, you would have to increase your retirement savings by 8% to have the same amount in retirement as if you had not made the withdrawal.
If you cashed in R200 000 you would have to increase your retirement savings by a massive 85%.
Preservation
You have three options when it comes to preserving these funds for your retirement:
- Company fund: Your first option is to transfer to your new company pension fund. This is often the most cost effective as the costs of a large company pension fund are usually carried by the employer and generally are lower due to economies of scale.
- Preservation fund: You can transfer to a preservation fund. Currently preservation funds allow you to make a one-off withdrawal before retirement (although it would be taxed) and this can act as an emergency net should you ever need it. Government may make changes to this rule, but it is unlikely that it will be retrospective.
But watch costs carefully. You do not want to suddenly find that your pension savings have been reduced by upfront and high annual fees. Some unit trust companies like Investec, Coronation and Allan Gray offer preservation funds directly to clients which helps reduce costs.
- Retirement Annuity: You can transfer the fund to a retirement annuity. This would only be beneficial if you were planning to continue contributing to the fund if for example your new employer did not provide a retirement fund. You would not have access to the funds before the age of 55. Again watch the costs.
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