As job mobility rises, managing your retirement savings during employer transitions becomes crucial.
In a recent webinar hosted by MoneywebNOW’s Simon Brown and Brett Mackay, an investment consultant from 10X Investments, they demystified this intricate topic by providing insightful advice and practical suggestions.
Whether you’re entering a corporate role, going freelance, or shifting careers, here are the essential takeaways.
1. Know your options upon resignation
Upon leaving a job, you can opt to transfer your retirement savings to your new employer’s scheme, retain them in your current plan, withdraw them (bearing in mind the tax implications and long-term savings effects), or move them to a preservation fund.
“Preserving is critical… avoiding unnecessary taxes is key,” highlights Mackay.
These decisions will have long-term repercussions, particularly concerning growth through compounding. While withdrawing may seem tempting, it can significantly impact your retirement savings.
2. Preservation funds: A prudent choice
Preservation funds allow your retirement savings to grow without tax liabilities during the transition. They also provide limited withdrawal flexibility prior to retirement age (55), facilitating some liquidity. Use the 10X Preservation Fund calculator to assess your circumstances.
“This product helps individuals protect their retirement savings until retirement,” Mackay notes.
Unlike retirement annuities (RAs), preservation funds don’t permit monthly contributions from your bank but can consolidate funds from various employment over time.
3. Avoid taxes that can erode your future wealth
The temptation to cash out can be strong, especially during job transitions. However, the tax consequences and potential future financial shortfalls are considerable.
Mackay illustrates this with an example: one person who withdrew R144,000 ended up nearly R400,000 short by retirement.
“This underscores the long-term advantages of keeping your funds invested for growth,” he asserts.
4. Retirement annuities offer flexibility and control
If your new employer doesn’t have a pension or provident fund, or if you’re venturing out on your own, consider establishing a personal retirement annuity.
“Continuing to grow your retirement savings through an RA is a strategic way to ensure you have significant funds later,” states Mackay.
RAs provide control over your contributions and investments, effectively supplementing employer-sponsored plans.
Check your retirement savings status using the 10X Retirement Annuity calculator.
A vital aspect of selecting a retirement or preservation fund is the effective annual cost (EAC)—a comprehensive metric of all fees required by the Association for Savings and Investment South Africa (Asisa), which your provider must disclose.
5. Fees can significantly impact returns
Source: 10X Investments
“By understanding and analyzing your costs, you can see how detrimental fees can be to your retirement wealth,” notes Mackay.
Lower fees ensure that more of your returns remain invested. Always compare EACs when selecting a provider, and consider using the 10X EAC calculator to maximize your investment returns.
6. Understanding the two-pot system
As of September 2023, retirement contributions are split into two sections: a retirement pot (accessible only at retirement) and a savings pot (which can be accessed annually, with tax implications).
“You can only access the savings pot, and it’s taxed at your marginal income tax rate,” explains Mackay.
This structure introduces liquidity but requires careful planning to avoid tax complications.
Use the 10X Two-Pot calculator for a financial evaluation.
7. Choosing the right provider and investment strategy
Selecting a low-fee fund with a strategic asset allocation is vital. For example, index funds offer diversification and cost-effectiveness.
“Tracking the markets is easier while keeping fees low—this strategy will benefit you in the long run,” Mackay advises.
Ensure your provider allows you to choose the appropriate strategy based on your age and risk appetite. Refer to this article for solid long-term investment strategies.
8. Consolidation before retirement is beneficial and common
As you approach retirement, merging your assets into one or two structured products can simplify your financial landscape and optimize tax advantages.
As Brown explains: “Treasury views your assets collectively as one pool of money for the one-third, two-thirds split and tax-free allowance.”
9. Changing providers is a viable option
Even if you are already invested, you are not permanently bound to one provider.
Transferring to another provider is feasible via a Section 14 transfer—just be cautious of exit fees on older legacy products. Consult with 10X about transferring today.
“It’s important to realize that you’re not stuck with your current provider,” Brown advises.
10. Don’t let jargon intimidate you
Perhaps the most reassuring takeaway: this process doesn’t have to be complicated.
“It’s simpler than many presume,” Mackay reassures.
“The more knowledgeable you are about your investments, the better you’ll be at managing them.”
Seek help if necessary, but don’t hesitate to take action. Consult with a 10X investment advisor for free to clarify details regarding your retirement savings.
Whether you’re 25 or 55, job transitions are part of life—and so is figuring out your retirement savings strategy.
By understanding your options, the implications of taxes, and the long-term consequences, you can make decisions that will enhance your future, not just your present situation.
Presented by 10X Investments.
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