What Should I Do With My Pension Or Provident Fund When I Resign?

Here’s an article I wrote for another insurance publication recently, and which I’m hoping, will add value to you going forward.
Sp without further ado…

This question about what to do with pension or provident fund benefits gets asked a lot, and since most of us do a lot of job hopping, it might be useful to store this newsletter somewhere safe in your financial planning folder (You do have one don’t you? 😳 ).

Basically, when you resign from a company you have four options:

  1. You can pay the tax and take your money.
  2. You can transfer the money to your new company’s pension or Provident fund.
  3. You can transfer the money into a retirement annuity fund, or
  4. You can transfer the money into a preservation fund.

Is taking the cash the right option?

We all know that option one is a bad choice. It’s not as if retirement is getting further and further away, no sirree… Retirement just keeps marching closer and closer! But hey, stuff happens and there’s times when you just need the money – full stop.
But before you choose this option just be aware of the tax implications.
As things currently stand, only the first R22, 500 (2011/12 tax year) of your pension-fund would be tax-free. The balance would be taxed as follows:

  • Anything between R22, 500 and 600, 000 would be taxed at 18%.
  • Anything between R600, 000 and R900, 000 is taxed at 27%, while.
  • Anything over R900, 000 is taxed at 36%.

That’s painful to say the least… Imagine you had R622, 500 in your pension-fund. You’d end up paying R 103, 950 of that in taxes!

So what about transferring it into my new company’s pension or provident fund?

This might be a good option since the transfer would happen tax-free if you transferred from pension to pension or Provident to Provident. Just be aware that transferring from a pension fund into a provident fund would create tax issues.
The other problem with this option is that the new fund might have limited investment options open to you. Remember that when you transfer your existing fund into your new employer’s fund, the new employers fund takes ownership of this investment. While some employer’s funds might be better than that from which you came, there’s a good chance it might not. You have far more control by investing it into either a retirement annuity or preservation fund of your choice. Nowadays there is a vast array of options available in the investment universe.

Right here is a good place to stop this article from getting too long, so let’s look at options three and four next week.

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Until next time.

The InsuranceFundi Team

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