Changing jobs? remember to preserve your savings

Tandisizwe Mahlutshana, Executive of Marketing at PPS Investments.

Millennials are renowned for job hopping. The 2016 Deloitte Millennial survey found that over 75% of South African millennials will switch jobs within the next five years and the 2016 Jobvite Job Seeker Nation Study found that 42% of millennials expect to change jobs at least every one to three years. Whether job hopping is considered beneficial or detrimental to one’s career prospects is debatable, but what is not debatable is the importance of preserving retirement savings when changing jobs.

The importance of preserving retirement savings is not true for millennials alone. At any age, if you’re about to change jobs, try to resist the temptation to tap into your retirement savings when doing so and consider investing in a suitable preservation fund instead.

When leaving an occupational retirement fund – whether due to resignation, retrenchment or the closing of the fund – you do generally have two options when it comes to your accumulated retirement savings.

The first of these is cashing in. However, if you choose to withdraw the money you’ve saved thus far, you’ll receive a relatively small portion tax-free but will be taxed on the rest of it at the rate then applicable by the South African Revenue Service (SARS). This means that your savings pool is depleted, a fair chunk of it has gone to the tax man and you have to start saving for retirement from scratch. The decision is irreversible.
Further, this will affect the tax rate of future withdrawal of retirement savings at retirement, potentially causing you to lose out on a significant tax free lump sum portion at retirement.

Alternatively, you could preserve savings – and reap the benefits in future. In this case, your savings will be transferred into a preservation pension fund (if originally transferring from an occupational pension fund) or a preservation provident fund (if originally transferring from an occupational provident fund) for reinvestment – without incurring any tax.

This means that you continue to benefit from compound growth, where future returns are earned on the total value of your investment, including your initial investment amount and all the returns you’ve previously generated as well. You will avoid any tax implication (and will only be taxed upon your retirement), which means that you can earn compounded returns on the full value of your current savings amount.

If you’ve changed employment in the past and already have one or more preservation funds in place, it may be worth considering whether you can lower the fees you’re paying by transferring to a more cost-effective fund. Remember that even a small reduction in fees could have a significant impact on the ultimate value of your investment.

A failure to preserve accumulated retirement savings means that you have to start saving from scratch – and now have less time to save. So when thinking of changing employment, keep in mind that consistent, contractual saving throughout your career is the best way to save towards a secure retirement. Also consult your intermediary and evaluate the fee structure of existing preservation funds, in ensuring that your investment offers you a flexible and cost-efficient portfolio.