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With retrenchment being an unfortunate reality for many, employees are wondering what will become of their pension and provident fund – and whether cashing it in is a smart move. Esta Theron, Business Development Manager at Glacier by Sanlam, says that “When a relationship ends with your employer, your financial contributions end too”. Depending on your specific fund rules, you may be able to leave your built-up pension in your employer’s pension fund, but unfortunately you cannot continue contributing.

Get everything in writing

Theron says that the most important thing to note when you are retrenched is the wording on the letter that you receive from your employer stating that you have been retrenched, which should come via your company’s HR department. If you don’t receive this letter from your employer, make sure that you request it from the HR department, as you are legally entitled to it.

“The most important thing to note when you are retrenched is the wording on the letter that you receive from your employer stating that you have been retrenched,” says Esta Theron, Business Development Manager at Glacier by Sanlam.

“On that letter it should clearly state that you have been retrenched (not that you resigned or were fired, for example) as well as stipulate your package total – your severance package, leave pay, your provident and/or pension fund totals, etc.”

Put your saved money to work – and watch out for tax!

Other than leaving the benefit in the fund with the employer’s fund (if rules allow for it), Theron strongly suggests that you transfer any pension or provident fund benefits, tax-free, into a preservation fund to reap the most benefits. If you take the lump sum from the fund at retrenchment, only the first R500 000 is tax-free, the rest will be taxable.

“It’s understandable that under current circumstances people may need urgent access to money. Times are tough and things are uncertain, but as far as possible I would recommend that you try not to touch these funds,” she says. “Your leave pay and severance package should be used to pay off as much debt as you can and to keep things running until you find a new job. If you do urgently need money, you can draw R25 000 tax-free from your preservation provident or preservation pension fund, but thereafter you won’t have access to any more funds until you turn 55.

Note: if you leave the built-up pension/provident fund benefit with your employer, you will not be able to do one withdrawal and then leave the rest in the fund. This means it may be better to rather preserve your retirement fund benefit in a preservation fund, as it’s more flexible.

“If you cash in more – or your entire fund – there are heavy tax implications. As always, it is best to seek the advice of a registered financial planner, as they will be able to suggest the smartest – and most affordable – options for your needs. There are ways around heavy tax implications if you move your money into the right type of investments, such as a retirement annuity for example.”

Three important things to remember

Theron reiterates the three most important things to remember when you get retrenched:

  1. Ensure that you receive a retrenchment letter from your employer and check the wording to make sure that everything reflects correctly
  2. Use your severance package and leave pay to pay off as much debt as you can and to tide you over until you find a new job
  3. Seek the advice of a registered financial planner to guide you on the best way to transfer your funds

“Remember why you have a pension fund in the first place – to financially safeguard yourself when you reach the age of 60 (and beyond). Don’t cash out your pension – ‘future-you’ will thank you!”

Please consult with a financial planner before you take any action regarding your savings and investments.

Glacier Financial Solutions (Pty) Ltd and Sanlam Life Insurance Ltd are licensed financial services providers.

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