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What will be the best option for my provident fund when resigning?

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Dear Reader,

Thank you for your question and congratulations on your new job. Firstly let’s explain what a provident preservation fund is.

A provident preservation fund is a type of retirement fund that enables individuals to preserve their retirement savings on leaving their employer’s provident fund.

The preservation fund has to be regulated by the Pension Funds Act and is associated with tax benefits – as such, a provident preservation may only accept tax-free transfers from a provident fund or another provident preservation fund.

As of 1 March 2021, a new law came into effect in the Pension Funds Act. New contributions made to provident funds from this date will be subject to the same requirements as a pension preservation fund or retirement annuity.

For those who were already members of provident and provident preservation funds on 1 March 2021, all benefits in these funds as at 28 February 2021, plus any future growth on these benefits, will not be impacted by the changes. These benefits will be given ‘vested rights’, meaning that members will still be able to take up to 100% of these vested benefits in cash at retirement. In addition to the vested rights on existing benefits as at 28 February 2021, if a provident fund member is 55 or older they will also receive vested rights on the benefits from the new contributions made to these funds from 1 March 2021 onwards. However, the changes will impact your new contribution made to your new provident fund.

When moving employers, you are permitted to move your previous provident fund to your new employer. However, before making a decision, it is important to understand all the options available to you.

You have said that you would like to take a cash lump sum before transferring the funds into another provident fund or a provident preservation fund. You are permitted to take any amount, but it will be subjected to the withdrawal lump sum benefit tax table, as shown below.

Taxable income (R)​ Rate of tax (R)​
R1 – 25 000​ ​0%
​R25 001 – 660 000 ​18% of taxable income above R25 000
​R660 001 – 990 000 ​R114 300 + 27% of taxable income above R660 000
​R990 001 and above ​​R203 400 + 36% of taxable income above R990 000

At retirement, individuals are entitled to R500 000 tax-free. This means that when you elect to take a certain portion (not greater than one-third of your retirement funds) as a cash lump sum, the first R500 000 will be tax-free. Thereafter, the amount will be taxed as per the retirement lump sum benefit tax table. However, prior to retirement if any withdrawals have been made from a retirement fund, this will impact the R500 000 tax-free amount.

We recommend that, if you do not require a cash lump sum from your provident fund, you transfer the full portion into a provident preservation fund to preserve the capital.

Regarding the risk strategy on your preservation fund, we generally  recommend that you consider a moderate risk strategy.

Example of a moderate strategy

    Annualised return
Funds Allocation 1 year 3 years 5 years
Equity fund 25% 13% 10% 10%
Balanced fund 25% 10.75% 10% 8%
Stable fund 25% 7.50% 8% 6%
Income fund 25% 7% 7% 8%
Weighted average cost and return 100% 9.56% 8.75% 8%
Returns are as at 30/11/2022. Past performances are not a guaranteed of future returns

Please note an average return was used for each asset class.

asset allocation, moderate risk investment, risk assets, fixed interest, cash

Source: Global & Local

You can expect growth of between 8% to 10% per annum as shown above.

Your financial advisor will be able you guide you to the right decision, however, you are more than welcome to contact us.

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