David Elliott of Marriott Asset Management explains how to choose between a preservation fund and a new employer’s pension fund when moving jobs
When you change jobs, you receive a pension pay-out, but the best thing to do with these funds is to keep them invested for your retirement. National Treasury is currently investigating ways to enforce preservation in response to an alarmingly high withdrawal rate of retirement savings prior to retirement.
We are already heavily incentivised to preserve the funds through the tax structure: any withdrawal is taxed at the taxpayer’s marginal tax rate which, at present, can be up to 40%. In addition, drawdowns of these savings can significantly reduce your likelihood of being able to earn enough income in retirement to sustain a desired lifestyle.
When starting a new job, you will be able to move your pension across to the new employer’s pension fund, or you could opt to retain the assets in a provident fund. What should you consider when making this decision?
Both the new company’s pension fund and preservation funds are governed by the Pension Funds Act, but there are certainly differences between them. These differences relate primarily to accessing the funds, investment choice offered, costs, and the type of fund at your existing company and at your new company.
A pension fund will only allow you to access your savings upon retirement, whilst a preservation fund will allow one full or partial withdrawal before retirement. In addition, you may transfer from one preservation fund to another at no cost and at any time. Even if you think you may not wish to withdraw your savings, this difference may be critical at another stage in your savings lifecycle.
The new company’s pension fund may allow investment choice subject to the rules of the fund, but some pension funds have a predefined portfolio. We would recommend you enquire about the specific fund’s rules. Most preservation funds on the other hand offer more investment flexibility, usually through a choice of unit trusts. For a more sophisticated investor, a preservation fund may offer the investment flexibility required. However, for many investors, too much choice can be problematic and difficult to manage.
Costs may also be very different in both products. It would be critical for you to establish the all-in cost of the funds you may be considering. Costs can significantly reduce the performance of a member’s account in a fund. What might appear to be a small difference in cost per annum, will have a significant effect on the value of the investment when measured over 30 years. The cost differential may thus be a major factor in making a decision.
The above assumes that the current savings are in a similar type of fund to the one your new employer offers. If the current fund is a pension fund and the new fund is a provident fund, it may not be possible to transfer the funds and hence a preservation fund would be necessary to house your savings.