Changing jobs? Remember your pension money!

Cape Town, 19 April 2012

The days of working for one employer for thirty years to claim that golden watch are gone for good. Today, the general trend in South Africa - in most industries - is to change jobs every five years in order to remain relevant, credible and suitably experienced. However the one thing employees tend to neglect when job hopping, is the financial implications.

Bev van Nijkerk, a segment specialist for the Young Professional Market at Sanlam, says keeping your financial planning in check is crucial as you advance in your career, and a lack of planning in this area could be detrimental in the long term.

“When you leave your current employment, money which you or your company contributed to your pension fund, becomes available to you. You then have the choice of what you’ll do with this money in order to continue to grow your financial portfolio and savings you’ve built up to this point,” she says. There are a number of factors to consider in order to make the most educated decisions regarding your future:

Bev recommends educating yourself first on your current financial portfolio before you consider pursuing greener pastures.

“First of all, consult your financial advisor and your human resources manager to determine your current cover and savings, and what the exact value of your pension fund, group life benefits (such as income protection and life cover) and/ or retirement annuities.  For example, do you know whether you’re covered for income or disability protection if you suddenly become unfit to work, how much will be paid out, and over what period?”

If you’re ready to shoot for that exciting position at a hot new firm, make sure you do your research during the interview process and determine exactly the type of benefits the new company has to offer. For example: does the new company offer you any group life benefits like income protection or pension scheme contributions, and how much? You need to weigh these up against your current portfolio and decide whether it is worth your (financial) while to move. Your salary alone (cost to company) might not always make for a justified decision to change jobs!

Once you’ve resigned, ensure that you tie up all financial loose ends at least six weeks before your last day at your current employer. You have the following choices in terms of pension contributions and Bev advises to sit with a financial advisor to help you plan the best route for your specific needs:

• Transfer funds from company A to company B: this is relatively easy to orchestrate. If you’ve contributed to a pension fund at your previous company, you can transfer the funds tax-free to your new employer. Just ensure that you make necessary arrangements to facilitate this process;
• Invest into a retirement annuity (RA): a retirement annuity is a secure and transparent long-term savings solution which offers a wide range of investment choices to help you spread your risk over time. The biggest benefits associated with an RA are that it can’t be touched by creditors, and you are able to deduct your contributions to an RA from your taxable income (up to certain limits). An RA does limit you from withdrawing the money before the age of 55 (retirement age), therefore making it a very disciplined option;
• Invest into a preservation fund: this is similar to a retirement annuity, except that it is more flexible, i.e. allowing you to withdraw money once before your retirement age for emergency like a financial crisis. The transfer is tax-free and is usually a good option if you take the time to understand where your money will be invested;
• Take the cash: despite it being very popular in South Africa, Bev strongly advises against this option – unless you’re starting a new business and investing it into equipment that could, for example, help to generate additional income. According to the Sanlam Benchmark Survey results of 2011, about 70% of people who leave one employer for another, opt for a cash payment, usually to cover their bigger expenses. This is a dangerous exercise as it will leave you having to start your retirement savings from scratch. And the younger you start saving for retirement, the more opportunity you’ll have to take advantage of compound interest.

“The best course of action is to discuss the various options with your financial planner to determine the most suitable option for you, considering where you are in your career, and what dreams you have for a financially secure future,” Bev concludes.