Question

I was recently retrenched and have just received a communication from the company pension fund which says that they will allow me to preserve my retirement funds with them. Should I do so?

Answer

There are pros and cons to doing this.  On the positive side, it should be cheaper to keep your money within the pension fund as you should be getting group rates on the administration fees.  These are usually less than you would pay as an individual investor.  You may also be able to make the investment without using an advisor and possibly save more fees.

There are, however, some downsides that you need to watch out for.  The choice of portfolios that you can invest in is often limited when you are doing an in-fund preservation. Group schemes generally have a limited choice of portfolios in order to keep costs down. These are often restricted further when it comes to individuals keeping the preserved money in the fund.

If you invested in a product that is designed for individuals, you would probably have access to a much wider choice of portfolios and could possibly invest in a portfolio that better meets your needs.

I would further caution against your going the “do it yourself’ route when you get retrenched as there are several important decisions that you need to make. The quality of these decisions can have long term implications to your overall financial wellness, so it does make sense to get some external input.  You would need to make decisions on the following:

• Cashflow

You need a flexible, tax efficient plan that will provide you with the necessary income should you not be able to find a job over the short or longer term.  Where you invest your accumulated retirement savings is important.

For example, if you do elect to preserve your retirement savings outside of the pension fund you should put it into a preservation fund rather than a retirement annuity.  You are allowed to make one withdrawal from a preservation fund should you be in financial trouble. This type of benefit is not available with their retirement annuity.

• Medical aid

You would not be able to remain a member of the company medical scheme and would need to take out an individual membership or become a member of a new scheme.  It is important that you do this within three months as there may be penalties and restrictions applied when you join a new scheme after three months.

• Risk cover

Most retirement funds have some kind of group risk cover.  These benefits would typically include life insurance and an income disability benefit.  Some of the better arrangements will also offer critical illness cover.

These schemes usually allow you to take over this insurance if you leave the company. There would not be any medicals if you apply for this continuation option within a month of leaving the fund.  

This is a very important benefit as your need for insurance cover does not fall away when you get retrenched.  I recommend that, whenever you change companies and there is a period before you start at a new company, you should make use of this benefit to ensure that your family is not exposed to any unnecessary risks.

As you can see, when you get retrenched there are several really important decisions that you need to make. It is important that you get a suitably qualified and experienced person to help you make these decisions.