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.
If you’re a member of your current employer’s medical aid scheme, be sure to take timeous 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 in excess of 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.
Deciding what to do with your retirement funds when changing employers is of critical importance as it can have far-reaching effects on your financial future. While you may be tempted to cash in your retirement fund benefits, this may not be the wisest decision in the longer term, bearing in mind that you will be liable for income tax on any cash withdrawal you make, with the first R25 000 being tax-free. If you choose not to cash in your retirement benefits, you have the following options available for consideration:
(a) Leave the funds in your 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 capital at any point prior to retirement. 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) Save in a preservation fund: If there is a possibility that you may need to access some or all of your accumulated retirement funds prior to formal retirement, a preservation fund is worthy of consideration. This is because preservation fund legislation permits investors to make one full or partial withdrawal from the investment prior to the age of 55, subject to tax. The nature of your preservation fund strategy will depend on a number of factors, including your age, time horizon to retirement, and your risk tolerance, keeping in mind that transferring your retirement benefits to a preservation fund is a tax neutral transaction. Also, keep in mind that you may not make additional contributions to your preservation fund except if the money originates from another retirement fund. As an approved retirement fund, no local dividends tax or tax on interest will be charged to your preservation fund account, and switches between unit trusts within your fund will not trigger a capital gains tax event.
(c) Transfer 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. On the other hand, you will be able to make additional contributions towards your retirement annuity on a monthly, quarterly, annual or ad hoc basis, on a tax-deductible basis, subject to the applicable annual maximums. If your new employer does not have a group retirement fund or if their fund rules do not permit transfer into the fund, and if you’re confident that you will not need to access your capital prior to retirement, then an RA structure is worth considering.
(d) Transfer to your new employer’s retirement fund: Lastly, you may have the option of transferring your retirement benefits to your new employer’s funds, depending on the type of funds you intend to move between. For instance, if you want to transfer from a pension fund to a provident fund, such a transfer will be subject to tax and would likely not be in your best interest. On the other hand, if you transfer from a provident fund to either a provident or pension fund, then you can transfer free of tax.
In deciding to withdraw cash from retirement savings prior to retirement, the short-term benefit of having cash at hand today should be weighed against the long-term impact of effectively saving less towards your long-term retirement goal in the future.
Group life cover
Ensuring that you remain adequately protected in respect of 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 lien with your new earnings, so be sure to discuss this with your financial advisor.
Update your budget
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.
Understand your last paycheque
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 paycheque to avoid unnecessary surprises at month-end. Obtain details from your HR department in terms of 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 paycheque will need to tide you through your first month at your new employer. At the same time, check salary payment dates with your new employer and then amend your debit order run dates, where necessary, to ensure that they are aligned with your salary payment dates.
Increase your savings
Now is a good time to take stock of your emergency savings to ensure that you have enough of a cash cushion in place. If your move involves a higher income, be sure to allocate some of your additional earnings toward your investment portfolio. Fortify your financial position by building your discretionary savings and making use of available tax incentives such as those afforded by tax-free savings accounts.
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