It is unfortunate that on withdrawal from a retirement fund most members are not made aware of the invaluable benefits that they have. The reasons are many, education in respect of the workings of the fund being primary. In my experience most of the blame can be placed at the door of the person administering the fund within the company. It seems as though there is always a delay in processing the paperwork needed to exit the member from the fund.
In the normal course of events, most individuals leaving employment pre-retirement age, give or are given at least two weeks notice of termination of employment. It is at this time that the necessary documentation should be completed and forwarded to the administrators of the fund. The employee should also be made aware of the options that he/she has concerning the benefits of the fund.
These are as follows.
- Withdrawal benefit: – This is the sum of money that is due to be paid to the member on exiting the fund. The statistic for people retiring financially independent in South Africa is a paltry 5% of the economically active (employed). The reason for this is twofold. Firstly South Africans are not savers and unfortunately time flies. By the time we realise the approaching disaster in terms of retirement, it is too late to prepare. Secondly, the average South African will change jobs approximately six to seven times during his/her life and most will take their withdrawal benefit, pay large sums in tax and utilise the balance on things that give immediate gratification e.g. a new car, furniture etc. – things that rapidly decrease in value. Here is an example of how this affects your retirement values.
Jones invests R2, 000 per annum from the age of 22 until the age of 28 and then stops. He leaves it in an investment until age 65. Smith starts at the age of 28 and invests R2, 000 per annum until age 65. Who will have the most money at 65 assuming that both investments will attract a 15% per annum growth rate?
Jones will have R3, 083,497.
Smith will have R2, 334,995.
This is the magic of compound interest and the cost of lost opportunities. The solution to this problem is one of education and it is incumbent on fund trustees to educate. It is also necessary for HR or personnel management to council departing members and refer them to professional financial planners.
- Continuation Options: – Most modern retirement funds have continuation options available on withdrawal. This means that a member leaving employment is entitled to effect an assurance policy of their own, with life cover and disability/income protection cover equal to that which they enjoyed whilst being a member of the fund. The huge advantage is that the member can have this cover without having to prove medical fitness (except for the mandatory HIV test). The problem here is that on most funds the option expires 30 days after the member’s last working day. Once again in most cases the delay in administration means that this benefit cannot be exercised.
Imagine that you are the exiting member. You might have a medical problem such as high blood pressure, high cholesterol or diabetes, which means that if you applied for assurance under normal circumstances, you might be denied the cover or in a best-case scenario, your contribution loaded (you will pay more). By exercising the continuation option within 30 days of your leaving the company you will be able to enjoy the cover at normal rates with the added bonus of not having to attend a medical examination.
Once again lack of education or inattention to the paperwork will result in this valuable benefit being lost forever.
Please note that if you are a trustee of a fund, in HR, Personnel or even General Management, you have a duty to advise members of their rights and to ensure that they have the opportunity of exercising or declining these benefits. It is in your fund and company’s interest that members are properly educated and counselled and that paperwork is completed in time.