A road trip to financial freedom
Leaving your employer: RA or preservation fund?
By Lizelle Steyn
16 June 2021
Photo credit: cottonbro
The day has come. You are leaving your employer. Maybe you’ve quit your job and you’re feeling elated about the new chapter ahead. Or maybe your job was precious to you and retrenchment is now forcing you to leave behind everything you’ve built up at the company. Whichever way, your retirement savings with your employer is precious and worth preserving. Should your transfer it to an RA or preservation fund, or choose one of the other options available?
Comparison of your options when leaving your employer
When leaving your employer, there are five different things you can do with your retirement savings in the employer fund.
| Option 1: Stay with existing employer fund | Option 2: Move to new employer fund | Option 3: Cash in all your retirement savings | Option 4: Move the money to a preservation fund | Option 5: Move to a retirement annuity (RA) | |
|---|---|---|---|---|---|
| When may this option not possible? | When the fund doesn’t allow it | When your new employer’s fund doesn’t allow it | Always allowed on resignation and retrenchment | Allowed on resignation and retrenchment | Allowed on resignation and retrenchment but not advisable if leaving a provident fund |
| May you take a partial withdrawal when leaving employer? | No | Yes | N/A - with this option you are choosing to withdraw the full amount | Yes | Yes |
| Tax on withdrawal when leaving employer | N/A | Taxed according to SARS withdrawal tables if resigned and less severe retirement tables if retrenched | Taxed according to SARS withdrawal tables if resigned and less severe retirement tables if retrenched | Taxed according to SARS withdrawal tables if resigned and less severe retirement tables if retrenched | Taxed according to SARS withdrawal tables if resigned and less severe retirement tables if retrenched |
| Tax on amount transferred | N/A – no transfer; money stays where it is | Not all of the transfer may be tax-free (see provident fund exception) | N/A – nothing transferred | The transfer is tax-free | The transfer is tax-free |
| Which rules apply to transferred amount? | Rules of your existing employer fund + Pension Funds Act | Rules of new employer fund + Pension Funds Act | N/A – you’re taking your money out of retirement products | Rules of the preservation fund + Pension Funds Act | Pension Funds Act |
| Until when is your money locked in? | Until age 55; no withdrawal allowed | Whichever happens first: you reach age 55 or you leave your new employer | N/A – you’re taking everything in cash | You’re allowed one more withdrawal before retirement. Taxed according to withdrawal tables (even if you were retrenched) | Until age 55; until then no further withdrawal allowed |
| Can you make additional contributions? | No | Yes | N/A | No | Yes |
Source: gofreedom.co.za
Cashing in means a truckload of tax
Cashing in all your retirement savings when leaving your job must rate among one of the worst financial decisions one can make. Not only do you have to start over with your savings (which were growing steadily inside a nice tax-free retirement fund) but you will instantly be making SARS richer and yourself poorer on withdrawal.
How much is the tax? If you resigned or were fired, the first R25 000 is tax-free and the rest is taxed according to the SARS withdrawal benefit tax tables. The R25 000 tax-free portion only applies if you’ve never used it before when leaving employment. To give you an idea, if you withdraw R1 million from your savings, you'll be paying more than R200 000 in tax. And should you want to withdraw more from your retirement savings in future, that will be taxed at 36%.
If you were retrenched, the tax penalty is less severe on this withdrawal. The first R500 000 would then be tax-free and the rest is taxed according to the SARS retirement tax tables. But, importantly, the R500 000 tax-free portion is what you’re allowed over your lifetime, cumulatively across all retrenchment and retirement events. So, use it wisely.
Option 3 – cashing in to travel - is exactly what I did in my 20s several times, and is part of the reason why I’m not yet financially free now at age 48, despite saving aggressively in my 40s. Cashing in your retirement savings – is seldom financially wise.
Except if you’re facing retrenchment
If you’re leaving your employer because you’re being retrenched, that’s a special case. It’s important to remember that SARS looks at the value of your withdrawal from your retirement fund and your severance package (minimum one week’s pay per year of service) combined. Using the SARS tax tables in case of retrenchment (scroll down to the ‘Retirement & Death Benefits or Severance Benefits’ header), Sars will consider the combined value of your severance and retirement fund pay-out, with the first R500 000 being tax-free. Say your severance package was R100 000 and you’ve never been retrenched before, then you can take another R400 000 tax-free from your retirement savings over your lifetime.
It’s crucial to remember that the special treatment of your withdrawal on retrenchment is lost once you’ve transferred your fund value to a preservation fund or retirement annuity. Once it’s in a preservation fund and you want to use your once-off right to another withdrawal, only the first R25 000 of that withdrawal will be tax-free. Therefore, if for example, you wanted to preserve your money for only a year or two before withdrawing it for a specific expense that you’re already planning for, this would be the one exception where it makes sense to rather cash in the money needed for that goal now and save on the tax you’ll be paying a year down the line.
Keep in mind that every withdrawal you make from your retirement savings at each retrenchment event will be added up by SARS in their record keeping and ‘eat away ‘at the R500 000 tax-free amount you are entitled to at retirement. The tax-free R500 000 is your lifetime allocation.
Sometimes leaving it all with your employer may be wise
Staying in your existing employer fund could be a good choice if:
- the fees are lower than what you would pay for a retail preservation fund or RA
- you get access to a fund name you already trust and are happy with
- you will not be subject to more rules and restrictions than what’s already in the rules of the Pension Funds Act.
Staying with your existing employer also means you don’t need to worry about your savings being out of the market for some time while the transfer is being finalised. But you can only access the money from age 55.
A provident fund deserves a special mention
Your employer fund can either be a pension fund or a provident fund or a combination of the two. Provident funds used to get special treatment in that you were allowed to withdraw everything on retirement and didn’t need to buy an annuity with at least two-thirds of your fund value, as has always been the rule for an RA and a pension fund. That all changed on 1 March 2021, so-called T-Day. All provident fund contributions after T-Day are now treated the same as contributions to an RA or a pension fund.
So, what would happen when you transfer your provident fund to an RA or the pension fund of a new employer? You would lose your right to withdraw all your contributions plus growth on retirement. You therefore want to make sure you transfer the ‘vested rights’ portion of your provident fund to a fund that can host the money with those same rights. The general rule when leaving an employer is therefore to transfer your old provident fund savings only to another provident fund or to a provident preservation fund - to keep the benefit of a withdrawal of the entire old provident fund portion (the part with vested rights) when you retire one day.
The popular choice when leaving your employer: RA or preservation fund?
The two most popular choices if you want to preserve your retirement savings are the RA and the preservation fund. A preservation fund can be either a pension preservation fund or a provident preservation fund.
- The preservation fund is great if you want to access your money once more before age 55 or if you want to keep the vested rights of your provident fund contributions before 1 March 2021 (T-Day).
- An RA is good if you want to protect yourself from yourself by making sure the law stops you from touching your money before age 55.
Summary of main differences between RA and preservation fund:
| Move the money to a preservation fund | Move to a retirement annuity (RA) | |
|---|---|---|
| Advisable if you’re leaving a provident fund? | Yes, specifically transfer to a provident preservation fund | No |
| Which rules apply to transferred amount? | Rules of the preservation fund + Pension Funds Act | Pension Funds Act |
| Until when is your money locked in? | Until age 55, but you’re allowed one more withdrawal before retirement. Taxed according to SARS withdrawal tables (even if you were retrenched) | Until age 55; until then no further withdrawal allowed |
| Can you make additional contributions? | No | Yes |
Source: gofreedom.co.za
How do you transfer your retirement savings?
If you’ve decided to transfer and preserve your retirement savings on leaving your employer, how do you go about it? Firstly you need to choose whom you would like to administrate your new preservation fund or RA. Allan Gray comes to mind for their good client service and thorough admin, as well as Satrix and Outvest for a simple low-cost index tracking fund offering.
In my experience, there’s a bit of ‘tension’ between the fund administrator which is about to receive the money and the administrator of your current retirement fund. The one receiving the money wants to complete the transfer as soon as possible; the ‘exiting’ administrator can drag its feet. Therefore rather contact the new administrator first and complete all their forms, so they can start acting as your ‘project manager’ to get this transfer done asap. You’ll also need to complete forms from your existing fund administrator, which your HR consultant should provide you with. The entire process unfortunately still takes several weeks, even with the best administrator on your side.
Remember, you can have as many preservation funds and retirement annuities as you like. If your existing preservation fund, for example, doesn’t keep the full benefits and vested rights of the provident fund portion you want to transfer, then start a new preservation fund that can accommodate you.
On the other hand, you also don’t want too many retirement funds and preservation funds across several companies, because most of the well-known brands offer a discount on fees once you have more than R1 million or R2 million invested with them. Try and balance your product needs with gaining some scale and access to lower fees for larger amounts invested.
In the end, when deciding what to do with your employer fund savings, it boils down to resolving the conflict between your immediate needs and the desire to stop paying unnecessary tax. Preserving as much as possible of your retirement savings for your actual retirement is a no-brainer. Leaving the back door open to later take a withdrawal when you might be in a financial squeeze is also wise – for most people. Then all that’s left now is to work out what portion of your savings to take now for any pressing expenses, and choose the company which you’ll be trusting with your precious retirement pot going forward. May you one day say that preserving your retirement savings was one of the best decisions you ever made.