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Think twice before cashing out your pension after moving jobs

30 April 2024 Asavela Gwele, Investment Consultant & Group RA Consultant at 10X Investment

The days when someone stayed at the same company for their whole career, while not entirely gone, are extremely rare.

A young worker today is far more likely to change jobs every few years, typically in the belief that this is the best path for career advancement. In fact, a 2023 survey by jobs board Pnet, shows just how frequently South Africans under the age of 35 change jobs.

Those in the admin, office and support sectors stay the longest, averaging three years and eight months. Those in the travel and tourism, sport and fitness sectors, meanwhile, are likely to stay in a job for less than two years.

While such rapid job changes may guarantee higher salaries, there are other financial considerations that workers should bear in mind. Take retirement, for example. If a company has a pension scheme, that can work out well for people who stay there for their entire careers (particularly if the company matches employee contributions). But when people change jobs or are retrenched, it can be all too tempting to cash out from that scheme and use the money on essentials. That’s a big mistake. Fortunately, there is a better way.

Compounding retirement issues

For retrenched people especially, the temptation to withdraw from a pension can be incredibly large. After all, retrenchment packages only take you so far and in a country with unemployment levels as high as South Africa’s, walking straight into another job is highly unlikely.

Doing so, however, can be incredibly damaging to one’s ability to retire. That’s because it undoes so much of the magic of compound interest. Ask any independent financial advisor and they’ll tell you that how long you invest is more important than how much you invest when it comes to retirement savings. They’ll also tell you that the later you start saving for retirement, the more you’ll have to invest to be able to retire. That’s because of compound interest.

It’s also worth mentioning that South Africans are pretty poor at saving in general and are especially poor at saving for retirement. As an illustration of how bad they are at saving, our own 10X Retirement Reality Report found that just six percent of South Africans are on course to retire comfortably.

Every time someone takes money out of a pension scheme when they change jobs, they move themselves a little further from the six percent of people who can retire comfortably and a little deeper into the 94% who can’t.

The power of preservation (funds)

There is, however, a better way, especially if you’re simply changing jobs. Rather than withdrawing the money, your first port of call would be to look at all of your available options to see what you can do with the funds. One option that can be particularly useful is a preservation fund.

A preservation fund is a retirement savings vehicle that allows a person who has recently resigned, been retrenched or dismissed from formal employment to have the option to continue with their retirement savings. Should you decide to take the preservation fund option, you would undertake what’s called a Section 14 transfer.

Essentially, this entails moving from one retirement administrator to another. The biggest benefit of taking this course of action is that there are no tax implications. That’s because the government is also trying to encourage people to not just take out the funds in the event of a job switch or dismissal but rather just continue saving through a different vehicle.

It is, however, important to note that you can’t then direct the pension benefits from your next job into that fund. Instead, you’d have to pay into the existing employee pension scheme. Alternatively, if the company doesn’t have its own scheme, you’d have to take out a separate retirement product.

Start early, be conscientious

As with all retirement products, it’s useful to have a preservation fund in place as early on in your career as possible. Even knowing that it’s there can make it less tempting to withdraw everything from your pension fund and spend it (something that’s all too easy to do, especially early on in your career when you feel invincible and retirement feels a long way away).

Of course, there are emergencies and other incidents where having that kind of money on hand quickly can be helpful. In the long run, however, it’s seldom worth it.

It’s also worth pointing out that in a country with an economy as volatile as South Africa’s, where retrenchments are commonplace, it’s better to have a preservation fund in place before you need it. Even if you opt to just draw the tax-free portion of your pension and then preserve the balance, it's important to be in a position where you are informed when you make that decision.

Ideally, we should all know about the savings and investment options available to us as early as university. I know from my own experiences, even as someone who studied in the financial field, that it can take a while to become aware of (and care about) the options out there.

That said, even if you’re only learning about preservation funds now, as long as you’re still working, you can enjoy the benefits they offer.

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