Today’s workforce is more mobile than it has ever been. Gone are the days of a job for life. Gone are the days when one had a planned career structure with a company training schedule and a clear career succession plan. There are a number of reasons for this. To name a few:
- The advent of the global village and international labour mobility ─ workwise the world is a much smaller place and labour is able to move more freely than it did 50 years ago.
- Global corporate downsizing trends in the 1980s and 1990s as a result of a more efficient use of resources. This has been made possible by the use of technology.
- Company decentralisation and specialisation.
- Upward mobility of the workforce as workers are tempted to climb the corporate ladder in search of an ever-larger pay cheque.
- An emerging culture of lifelong learning, portfolio careers, self-development and an overwhelming need to stay employable.
Whilst this job-changing trend may be helpful from a career point of view, it does create the threat of leakage in the savings pool as workers have the option to cash in their retirement savings when changing jobs.
Research shows that a significant number of South Africans do take the cash option.
The table below shows the effect on an employee who had been diligently saving R10,000 (growing at inflation) since joining the workforce and changes jobs at age 32.
- In scenario A the employee continues with the Retirement Savings when changing jobs.
- In scenario B the employee cashes in the sum of approximately R190,000 when changing jobs.
| Age |
Savings |
Retirement Fund Balance |
Age |
Savings |
Retirement Fund Balance |
| 23 | 10,000 |
11,000 |
23 | 10,000 |
11,000 |
| 24 | 10,500 | 23,650 | 24 |
10,500 |
23,650 |
| 25 | 11,025 | 38,143 | 25 | 11,025 | 38,143 |
| 26 | 11,576 | 54,691 | 26 | 11,576 | 54,691 |
| 27 | 12,155 | 73,530 | 27 | 12,155 | 73,530 |
| 28 | 12,763 | 94,922 | 28 | 12,763 | 94,922 |
| 29 | 13,401 | 119,156 | 29 | 13,401 | 119,156 |
| 30 | 14,071 | 146,549 | 30 | 14,071 | 146,549 |
| 31 | 14,775 | 177,456 | 31 | 14,775 | 177,456 |
| 32 | 15,513 | 212,267 | 32 | 15,513 | – |
| 33 | 16,289 | 251,411 | 33 | 16,289 | 17,918 |
| 34 | 17,103 | 295,366 | 34 | 17,103 | 38,523 |
| 35 | 17,959 | 344,657 | 35 | 17,959 | 62,130 |
| 36 | 18,856 | 399,865 | 36 | 18,856 | 89,085 |
| 37 | 19,799 | 461,630 | 37 | 19,799 | 119,773 |
| 38 | 20,789 | 530,662 | 38 | 20,789 | 154,619 |
| 39 | 21,829 | 607,739 | 39 | 21,829 | 194,092 |
| 40 | 22,920 | 693,726 | 40 | 22,920 | 238,713 |
| 41 | 24,066 | 789,571 | 41 | 24,066 | 289,058 |
| 42 | 25,270 | 896,324 | 42 | 25,270 | 345,760 |
| 43 | 26,533 | 1,015,143 | 43 | 26,533 | 409,522 |
| 44 | 27,860 | 1,147,303 | 44 | 27,860 | 481,120 |
| 45 | 29,253 | 1,294,211 | 45 | 29,253 | 561,410 |
| 46 | 30,715 | 1,457,419 | 46 | 30,715 | 651,337 |
| 47 | 32,251 | 1,638,637 | 47 | 32,251 | 751,947 |
| 48 | 33,864 | 1,839,751 | 48 | 33,864 | 864,392 |
| 49 | 35,557 | 2,062,838 | 49 | 35,557 | 989,943 |
| 50 | 37,335 | 2,310,190 | 50 | 37,335 | 1,130,006 |
| 51 | 39,201 | 2,584,331 | 51 | 39,201 | 1,286,128 |
| 52 | 41,161 | 2,888,041 | 52 | 41,161 | 1,460,018 |
| 53 | 43,219 | 3,224,387 | 53 | 43,219 | 1,653,561 |
| 54 | 45,380 | 3,596,744 | 54 | 45,380 | 1,868,836 |
| 55 | 47,649 | 4,008,832 | 55 | 47,649 | 2,108,134 |
Assumptions:
Inflation: 5%
Growth rate: 10%
The table shows that the decision to cash in the Retirement Savings at age 32 results in the employee having significantly less at retirement. In this example, the employee ends up with approximately half the Retirement Savings at age 55. Clearly an inferior outcome!
This leakage in scenario B is compounded by the fact that tax would be payable on the amount that has been cashed in.
There are a number of alternatives to cashing in for a worker younger than 55:
- The employee could leave the pension with the existing pension fund until age 55 or retirement (if rules allow).
- The employee could move to the new job with the old pension savings (if the rules allow) and simply build on what has been saved thus far.
- The employee could transfer the funds to an “independent” preservation fund and thus allow for growth until retirement.
There are a few other financial aspects that need to be taken into consideration when changing jobs:
Medical Aid
- Is the new employer’s medical aid the right one to join?
- Will the new employer help cover some of the medical costs and how does this compare to the old employer?
Life insurance
- How much life cover does the new employer’s retirement plan include?
- Will this be sufficient?
Retirement annuity
- Will the income from the new employer be deemed as ‘pensionable income’ ?
- Do you need to consider a retirement annuity?
Changing jobs is a big financial decision. We at Personal Trust would welcome the opportunity to help you or a family member make the right decision when changing jobs. Should you or a family member be faced with this decision, please do not hesitate to contact us.