98 - What to do with your pension fund after changing jobs
Question: I will be changing companies at the end of the month and want to know what I should be doing with the money in my pension fund.
Answer: When changing jobs, there are many decisions that have to be made — but often people do not spend enough time thinking about what to do with their pension fund money. The decisions that you make here can have major implications for your long-term financial wellness, so it is important that you look at the options available.
Take the cash
You can take a withdrawal benefit, but I would certainly not recommend this as you will end up paying a lot of income tax now. You will feel the consequences in years to come when you retire and find that you do not have enough to live on.
Leave the money in the fund
You can leave the money in your current retirement fund. The admin charges here are often lower than in a private arrangement. The downside is that you often have a very limited range of investment portfolios open to you. You may get a better result over the longer term by investing elsewhere where higher returns offset the higher admin fees.
Retirement annuity
You can put your money into a retirement annuity. The advantage here is that you will have a decent choice of portfolios to invest in and there will be no tax payable on the amounts transferred into the retirement annuity. The downside is that you are unable to access any of the funds before you turn 55.
Preservation fund
This is the solution that I like to use for most of my clients. Here you can invest in a wide range of investment portfolios and there is no tax payable on the money transferred. The big advantage of a preservation fund is that, if at any stage in the future, you need to access some of the funds, you will be allowed to make one withdrawal from the fund. This can be all or part of the value of the fund. You cannot do this with a retirement annuity.
When you transfer money to a preservation fund do not be tempted to take out any money in cash. If you do so, this will be seen as your one withdrawal and you will not be able to access the funds before you turn 55.
Insider tip
Most retirement funds offer group risk benefits. Many of these group risk benefits come with conversion options which allow you to continue to receive the risk cover if you pay the premiums yourself. There is no medical underwriting required here. Underwriting has become quite strict since Covid arrived and people are finding it increasingly difficult to get risk cover.
This is a nice way of maintaining your current level of risk cover without any underwriting. You usually have 30 days in which to exercise this option so you should request it when you resign.
Again, before you make any big decisions, have a chat with a financial planner who can help you make the right decisions for your particular circumstances.
