Regardless of the stage you are at in your life and career, it is very important to make sure you are taking care of your retirement funding, so that by the time you are ready to retire you can do so comfortably, knowing you are in a positive financial situation to do so. To understand why cashing in your retirement fund when you change jobs can be detrimental to your retirement plans is crucial to everyone.
While changing jobs is an exciting time in any person’s career, it’s important to make the right decision when it comes to your Retirement Fund. Will you cash in, transfer it to a new fund or a combination of both? Have you considered your own retirement goals and the implication of tax payments to SARS if you cash in?
One of the biggest retirement funding mistakes often made, is making the decision to cash in your retirement fund when you start a new job. According to the 2017 Old Mutual Corporate Retirement Monitor, the increase in the number of members cashing in their retirement funds has increased dramatically, from 19% in 2013 to 35% in 2017.
On withdrawal from a Retirement Fund the South African Revenue Services does grant a tax-free portion to members taking cash portions, granted once off in their lifetimes since 2009 when the legislation came into effect. On withdrawal the first R25,000 of the benefit is tax free (this is amended from time to time), the balance is taxed on scale and it is offset against the tax-free portion on retirement which is R500,000, thereby reducing your tax benefits at retirement.
In addition to the tax penalties you may incur when choosing to cash in your Retirement Fund, which are upwards of 18% after taking any allowable tax-free portion/s, you will also be placing unnecessary pressure and stress on your future retirement plans, as cashing in ultimately means starting your retirement savings from 0, and forfeiting on the benefits of compound interest over the years to come. So, while cashing in when you change jobs may alleviate any current financial stress you are facing today, it may mean future financial burdens when you are ready to retire.
If you are changing jobs, rather consider transferring your retirement savings to your new employer’s Retirement Fund. If your new employer does not have a Retirement Fund, then consider consulting a broker who can assist you to reinvest and preserve your Retirement Fund benefit into another Approved Retirement Fund, such as a Preservation Fund or Retirement Annuity. Always remember that a Retirement Fund is there to support you financially when you retire, and the long-term impact of cashing in your savings before retirement could be harmful in more ways than one.
At Cornerstone Employee Benefits, we can assist you with the preservation of your Retirement Fund when changing jobs. Contact us, to find out how we can assist you and help you plan for your retirement.