IN managing superannuation pension contributions employees need to make the right decisions when they change jobs or become self-employed.

Last week I met separately with two self-employed individuals who previously contributed to an employer-sponsored pension plan but who were not sure what decision to make regarding the future of their retirement funds.

In another scenario, a human resource manager brought to my attention the case of some employees who have chosen to enforce the early retirement option (age 55) from a previous superannuation fund that was wound up, instead of deferring access until the normal retirement age of 65. These employees prefer to treat the retirement funds as current income and are not aware that they are sabotaging their financial future. They are losing out on compound growth of pension funds for at least another decade, which would result in a substantial nest egg that would provide an increased monthly pension at age 65. Self-gratification is preferred rather than choosing to understand the future value of money. I am imploring employees to appreciate how much their investment today will be worth in the future. Some employees have failed to accept the benefits of compound interest and time in growing their money to create financial freedom as they age. They are averse to the concept of putting their money to work and instead are busy spending their earnings — which will prove to be of little value in the future as purchasing power is reduced with time.

Today’s article addresses the pension options available when changing jobs and how to make the decision that best suits your retirement goals. The following are some options:

• Perhaps the easiest option is to leave the pension funds invested with the former employer so as

to provide a deferred pension later.

• Transfer the pension proceeds to an individual retirement scheme.

• Request your contribution as a lump sum payout and leave the vested portion with the

company to provide a deferred pension by way of an annuity later.

• If vested, access the full pension payout as a lump sum at early retirement age .

• Transfer pension funds to new employer’s superannuation fund.

• Access monthly pension at early retirement age.

• If not vested, request a lump sum of individual contributions.

Please note that employees who are vested own 100 per cent of the funds in their account, including the employer’s contribution.

In the case of the two self-employed individuals mentioned earlier, they are both vested. One of them parted ways with his former employer 10 years ago; he collected his contribution upon termination and left the “employer’s” portion. This portion has grown significantly but he has no access until age 50. Unfortunately, he spent his pension contributions so long ago that he didn’t even recall receiving the funds. This situation reinforces the importance of investing the pension contributions instead of spending them. Employees who choose to spend pension lump sums should do so only if it’s necessary. Taking lump sums before retirement attracts taxation, in addition to losing the long-term compound growth of pension funds. I, therefore, advised him to allow the employer’s portion to remain until normal retirement, based on the fund’s performance.

Meanwhile, the second self-employed individual referenced earlier is at early retirement age but has taken his contributions as a lump sum and decided to leave the vested portion with the old employer. He will, therefore, receive a deferred pension at normal retirement age. In addition, he is currently receiving a monthly pension from another former employer. He plans to invest the lump sum while funds from the monthly pension payouts will be added monthly to his investments. People who have the discipline to manage their investments will likely succeed at investing the lump sum themselves.

A common option upon leaving a job is to transfer pension funds to an individual retirement scheme. This allows flexibility and control in managing your pension funds, example through asset allocation. I recommend that you research whether they will pay higher fees if funds are left with the former employer to invest. If the decision is to have contributions remain with the previous employer then a performance review will become necessary as well as service delivery. Annual statements are important to track performance and any policy changes. Also of note is the fact that pension transfers attract a fee, and the costs vary from one provider to the other. When leaving an organisation, all factors and individual circumstances must be borne in mind in arriving at a decision that will best serve your retirement goals. A competent financial advisor can help.

Grace G McLean is a financial advisor and retirement specialist at BPM Financial Limited. Contact her at: gmclean@bpmfinancial or visit the website: www.bpmfinancial.com. She is also a podcaster for Living Above Self. E-mail her at livingaboveself@gmail.com