What happens to my savings in an employer-sponsored fund if I leave my employer?

If you resign, are fired or retrenched, your retirement savings in an employer-sponsored fund will remain safely in the fund, unless you decide you want to transfer the money to another fund.

You can also withdraw the money in cash, but this is typically not a good decision. Read more: Why withdrawing from your retirement fund is a bad idea

These are your options:

1. Keep your savings in your employer-sponsored fund or umbrella fund

An employer-sponsored fund and an umbrella retirement fund are obliged to allow you to keep your savings in the fund when you leave.

This is in terms of a regulation under the Pension Funds Act - regulation 38 - that was put in place on September 1, 2017 and made effective for all funds from March 1, 2019. The retirement industry refers to this as in-fund preservation.

Regulation 38 obliges funds that require members join as a condition of employment, to provide in their rules of the fund for members to become “paid-up” when they leave the service of the employer before retirement.

The regulation does not apply to retirement annuity funds or preservation funds.

Keeping your savings invested in a fund when you leave an employer means you won’t incur any additional costs or any tax, and it will help you greatly to achieve a comfortable income in retirement.

You should remember that keeping your funds invested in your employer-sponsored or umbrella retirement fund could be a cost-effective way to preserve your savings, as the costs will be at what is known as institutional rates, and may be lower than those of a fund designed for your individual savings, such as a retirement annuity fund or preservation fund.

Here are a few things you should know about leaving your savings in a fund when you leave your employer:

• PAID-UP MEMBER CERTIFICATES    A paid-up member certificate should contain the following information: The fund name, address, registration number and contact details. The administrator’s name, address and contact details. Your name, address, identity number, tax number, fund membership number and most recent contact details. The date you became a paid-up member and the certificate was issued. The value of your savings in the fund at the date you became a paid-up member.

  When you become a “paid-up” member you can no longer make further contributions to the fund and you no longer enjoy the group life benefits.
• Your fund must, within two months of becoming aware that you have left your employer, issue you with a paid-up membership certificate so you can prove your membership of the fund.
• Your fund is obliged to automatically make you a “paid-up” member until you elect to withdraw or transfer your savings to another fund – a decision you can make at any time.
• Your fund is obliged to charge you the same investment fees as you would pay had you remained a contributing member.
• Your fund can’t charge you any initial once-off fee to become a paid-up member.
• You can be charged a different administration fee from that which contributing members of the fund are charged, but the regulations state that the fees for paid-up members must be “fair and reasonable” and on a par with the administration fees that active members of the fund are paying.
  In a guidance note on the regulations, the Financial Sector Conduct Authority (FSCA) says the administration fees should be lower than those for a contributing member, as the fund will not be collecting contributions. Funds may, however, incur some costs keeping in contact with you when you leave your employer.
• Trustees have been advised by the FSCA to avoid administration costs that erode your benefit over time if your savings in the fund are low.
• If you die before retirement, the trustees will distribute your savings to your dependants and anyone else you have nominated as a beneficiary in line with the requirements of the Pension Funds Act.
• Defined benefit funds can preserve your defined benefit – deferring payment of the benefit until your original retirement date – or they can convert your benefit into a defined contribution benefit and save it in the fund.

If you preserve your savings in your employer-sponsored or umbrella retirement fund when you leave an employer, you can later choose to transfer that money to a preservation fund that allows a partial withdrawal, to a retirement annuity or to a new employer’s fund.

2. Transfer your savings to your new employer’s fund

The rules of any employer sponsored pension and provident funds, as well as umbrella retirement fund's must provide for you to transfer to it the retirement savings you had with another employer sponsored or umbrella fund.

When you join a new fund, it is obliged to ask you for a list of all your paid-up membership certificates from previous funds, and, if you ask it to, to arrange for the transfer of those benefits to your new fund.

The transfer will be done by way of what is known as section 14 (of the Pension Funds Act) transfer.

If you transfer your benefits out of one fund to another, the fund from which you are transferring must offer you retirement benefits counselling so you understand your options.

Transferring your savings to your new employer’s fund has no tax implications and the only cost you may incur is the cost the FSCA charges for the transfer.

It may be wise to get some advice from a qualified financial adviser on whether it is in your best interests to transfer out of one employer-sponsored or umbrella fund to another. Costs and investment choices are likely to differ.

3. Transfer your savings to a preservation fund

You can transfer your savings to a preservation fund. Most financial institutions that offer retirement funds also have a preservation fund, but you should check the costs before committing.

Preservation funds have both an advantage and a disadvantage over other retirement funds:

The big disadvantage of a preservation fund is you cannot contribute to the fund. You can only transfer into it lump sums from a fund you are leaving.

A big advantage is that, should you need to, you can make one withdrawal before retirement, which can be all of your savings.

A preservation fund allows you to take part of your retirement fund benefit as cash - after you pay the tax - and then transfer any balance tax-free to the fund.

You are then allowed to make one further withdrawal - either part of your savings or all of it - from that fund before retirement. Read more: Why is withdrawing from my retirement fund a bad idea?

This could be useful if you do not have adequate savings for an emergency in an emergency fund, but you should try not to withdraw any of the savings you have set aside for retirement.

You can also transfer savings in a preservation fund to a new employer-sponsored or umbrella fund that you join.

You can invest the proceeds from a number of different retirement funds in the same preservation fund, but if you have been saving in a provident fund and you have rights relating to how much you can withdraw as a lump sum at retirement, you need to transfer your savings to a provident preservation fund.

4. Transfer your savings to a retirement annuity fund

You can transfer your savings to a retirement annuity (RA) fund available from any financial institution, but again you should keep an eye on the costs.

If you transfer your savings to an RA, you cannot access them until at least age 55, unless you emigrate or choose to stop contributing and your savings are less than R15 000.

The advantage of using an RA is that you can continue to contribute to it, adding to the amounts you have already saved.

If you preserve in an existing employer-sponsored fund, you can also keep your savings in that fund and open an RA for new contributions.

COSTS TIP Many retirement funds base their charges on the amount you have saved in the fund. This may make it wise to consolidate your savings in order to enjoy lower charges, but you need to consider a number of issues including investment choices.

Sources:

http://www.treasury.gov.za/publications/RetirementReform/Final%20Default%20Regulations%20Gazetted%2025August2017.pdf

https://www.fsca.co.za/Notices/Notice%202%20of%202018.pdf ‘

https://www.fsca.co.za/Regulatory%20Frameworks/Guidance%20Notes/Guidance%20Notice%208%20of%202018.pdf