In the modern working environment, many companies provide their employees with the opportunity to save a portion of their current income in a pension, in preparation for retirement. The employee’s contribution is normally accompanied by an employer contribution. Employees may also make additional voluntary contributions to supplement their savings, and together these contributions amount to saving towards retirement.
Though the need for this accumulation and preservation is widely understood, it is however becoming increasingly common that individuals deplete these funds before retirement by withdrawing a portion of their full pension benefit before they have reached retirement age. In some cases, this may be as a result of circumstances, such as changing career paths, being retrenched or dismissed. These circumstances normally also make the money saved up for retirement available to you.
Making wise choices when deciding what to do with this money when it becomes available is very important. Withdrawing it in cash means that you will need to rebuild your retirement savings, and would not have accumulated as much for your retirement when you no longer have a steady monthly income. The wiser option would be to preserve your retirement savings until retirement.
OPTIONS AVAILABLE TO PRESERVE YOUR SAVINGS
IN A FUND
Though the option to withdraw exists, the following options are also available to carry on growing your savings in a fund:
• In the situation of movement between two employers, more often than not, the new employer will have a pension fund of its own. Therefore, it is possible to simply have the saved funds transferred to the new employer’s pension fund. In this case, you will be informed of the benefits of the new fund, and can simply carry on making contributions to your already accumulated savings along with the new employer’s contributions.
• In the event that the new employer does not have a pension fund, or if you have resigned, been retrenched or become self-employed, the option exists to leave the savings in the existing retirement fund. In this case, the savings will continue to be invested in that fund until your retirement and you will still be entitled to the benefits.
• It is also possible to invest these savings in a preservation fund. In this case, you transfer your benefit into the preservation fund. Here it will be invested and continue to grow until an agreed retirement age is reached.
BENEFITS OF PRESERVING YOUR SAVINGS TILL
It is vital to remember that in the absence of income generating activities, a retired individual will most likely not be making money, but rather spending it. This highlights why the benefits of preserving retirement savings cannot be exaggerated. The following are some of the reasons why it is beneficial for retirement savings to be preserved:
• Your retirement savings plan continues. People are living longer and leading more active lives in retirement. For this reason it is more important than ever to think about where your income will come from when you retire.
• It is tax effective. Cash withdrawals from retirement savings are taxed while keeping savings in an approved fund does not attract tax until retirement.
• Savings will remain intact and continue to grow until retirement, therefore, gaining investment income over time.
• It keeps your money safe. No matter what happens to your other finances, the money you preserve is safe from creditors.
• It eases the burden for your care on other family members. You will be better equipped to provide for yourself in your old age.
• Lastly, it is extremely vital to realise that the “time value of money” would take effect. N$ 1 today will not be N$ 1 tomorrow. In light of this, it is highly likely that whatever can be purchased for N$ 1 today, would require more than N$ 1 in the future. Investing today ensures that you are better prepared to deal with the expenses of tomorrow.