If you’re excited at the prospect of changing jobs or career paths, don’t lose sight of the fact that there are several key financial decisions to be made, as well as some potential adjustments to your financial portfolio which should be considered. In this article, we take a closer look at the financial implications of changing jobs and the steps you can take to make the process more streamlined.
Healthcare cover: Avoiding gaps in medical aid
If you’re a member of your current employer’s medical aid scheme, be sure to take timely steps to ensure ongoing medical aid coverage when you change jobs. If you are currently a member of a closed or private medical scheme, membership of that scheme will cease on your last day of employment, and you will need to apply to a new medical scheme for membership. Find out as early as possible what medical aid benefits your new employer offers and whether any medical aid subsidies apply. Ideally, you will want to ensure that there is no break in medical aid membership when moving between employers, as this can leave you financially exposed. Keep in mind that if you allow a break in membership exceeding 90 days, you may be subject to waiting periods and exclusions when applying for membership. If you have a gap cover policy in place in your personal capacity, such cover will not be affected by your change in medical aid membership, although it may be an opportune time to check whether your new medical aid benefits and your gap cover policy provide sufficient protection for your needs.
Retirement funds: Evaluating your options carefully
With the implementation of the Two-Pot Retirement System from 1 September 2024, it is more important than ever to evaluate your options carefully when changing employers. Decisions regarding your retirement savings can have a lasting impact on your financial future. While cashing in your retirement fund may seem appealing, it is usually not advisable. Not only will you be liable for tax on the withdrawal, but doing so also compromises your long-term retirement security.
Under the new Two-Pot system, retirement contributions are now split between three components:
- Savings Pot: A portion of your contributions (one-third) will be accessible, offering flexibility in times of financial strain. These withdrawals will be taxed at your marginal tax rate.
- Retirement Pot: The remaining two-thirds will be preserved strictly until retirement.
- Vested Pot: This is your accumulated retirement savings up to 31 August 2024, which retains the rules applicable before the implementation of the two-pot system with the first R27 500 being tax-free.
When changing jobs, and depending on the rules of your current fund and the new legislation, you generally have the following options:
(a) Leaving funds in your current employer’s retirement fund: As a member of your current employer’s retirement fund, you have the option to leave the funds where they are. If selecting this option, keep in mind that the funds will remain invested until you reach formal retirement age. Once you have selected this option, you will not be able to access your vested capital at any point prior to retirement. Your Savings Pot (if any has been built up) may be accessed annually, subject to the fund rules. In contemplating this option, give consideration to your short- to medium-term financial needs, whether the scheme rules of your new employer’s retirement fund will permit you to transfer your capital across, and the type of strategy your money will remain invested in should you keep the funds where they are.
(b) Transferring to a preservation fund: This option remains viable for those who may require access to capital before retirement. You are allowed one full or partial withdrawal from the preservation fund before the age of 55, which will be subject to tax. Preservation funds currently do not yet fully reflect the Two-Pot System, so any funds transferred into a preservation fund retain their status as Vested Benefits, and are therefore not subject to the new rules. No new contributions can be made into this fund unless originating from another approved retirement structure.
(c) Transferring to a retirement annuity: Transferring your retirement benefits on a tax-neutral basis to a retirement annuity is another option worth considering, although there are a few details worth noting. Firstly, once you have transferred your capital into a retirement annuity, you will not be able to access your capital before the age of 55 with the exception of your Savings Pot as per the Two-Pot Retirement System regulation. However, note that any funds transferred into an RA before September 2024 (or from non-Two-Pot funds such as preservation funds) remain part of the Vested Pot and are locked in until age 55. Additional voluntary contributions to an RA remain tax-deductible, within the prescribed annual limits. This option may be appropriate if your new employer does not offer a retirement fund, or if you want to manage your retirement independently with additional contribution flexibility.
(d) Transferring to your new employer’s retirement fund: Lastly, you may have the option of transferring your retirement benefits to your new employer’s fund, depending on the type of funds you intend to move between. For instance, if you are transferring from a pension fund to a provident fund, the transfer may trigger a tax liability and would likely not be in your best interest. However, transferring from a provident fund to either a provident or pension fund can be done free of tax. Under the new Two-Pot Retirement System, any future contributions into your new employer’s fund will be split between a Savings Pot, which allows for limited annual access, and a Retirement Pot, which remains preserved until retirement. Your existing benefits accumulated before 1 September 2024 will be treated as Vested Benefits, which are not subject to the new withdrawal rules and will remain preserved as before. In deciding whether to access cash from your retirement savings now, it is important to weigh up the short-term relief of available cash against the long-term impact of reducing the capital available to fund your retirement in the future.
Group life cover: Protecting your benefits
Ensuring that you remain adequately protected regarding death and disability throughout the transition period is equally important, as any lapse in cover can leave you at financial risk. Before joining your new employer, ask for all details pertaining to their group risk cover and the relevant options available to you as this information is critical to your decision-making. If your new employer does not provide group cover, make it a priority to find out whether your current group policy includes what is known as a continuation option. A continuation option allows you to convert your group life cover into personal cover within 60 days of leaving your employment without having to undergo medical underwriting, which means that you are likely to enjoy more favourable premiums. If your new employer does provide group risk benefits, be sure to fully understand the details of any life, capital disability, and/or income protection cover included on the policy. Ideally, ask your financial advisor to do a full risk cover assessment to establish whether your new group risk cover is sufficient for your needs, or whether any shortfalls exist in your portfolio. If you have a personal income protection benefit, you may want to increase your nominated income in line with your new earnings, so be sure to discuss this with your financial advisor.
Updating your budget: Planning for income changes
Once you’ve made decisions regarding your retirement funding and risk cover, be sure to update your monthly budget taking into account your new income. Ask your new employer for a simulated payslip so that you have clarity on your take-home pay, as this will form the basis of your updated budget. Think carefully about what additional expenses may arise as a result of your new employment, such as increased travel costs, parking expenses, additional equipment, or an updated work wardrobe. Similarly, consider whether any expenses may reduce or fall away altogether—for instance, if your new employer provides a medical aid subsidy or company car.
Understanding your final pay cheque
As part of the transition from your current to your new employer, be sure that you understand in advance what to expect in terms of your last pay cheque to avoid unnecessary surprises at month-end. Obtain details from your HR department regarding any leave or other deductions that will be made, so that you know what to expect and can plan accordingly—keeping in mind that your last pay cheque will need to tide you over until your first payday at your new employer. At the same time, check salary payment dates with your new employer and amend your debit order run dates, where necessary, to ensure that they are aligned with your salary payment dates.
Changing jobs is an exciting opportunity, but it’s important to navigate the financial transition thoughtfully. By proactively addressing healthcare cover, retirement planning, life cover, budgeting, and savings, you’ll ensure a smoother, more secure shift into your new role.
Have a great day.
Sue
