If you are a contributor or participant in an occupational pension scheme (group pension plan), cashing out your pension funds upon changing jobs is not the best option.

Too often employees leave their jobs and spend their pension contributions or pension funds instead of having the proceeds invested for their retirement. There are several viable options available to employees that will provide a sizeable retirement nest egg if funds are invested instead of spent.

Employees should take a long-term view of their lives and financial future when money paid into a pension fund is returned to a worker upon resignation. There is the adage “Time is money”. Unfortunately, we can’t recover lost time, which is needed for pension funds to compound and create a comfortable standard of living during retirement.

The idea that we can play “catch-up” as we get older by increasing pension contributions and investment amounts as compensation for cashing pension funds too early can prove detrimental in the long run. You may be forced to retire early and that’s the end of your best intentions. Inflation is another factor. Known as the “silent thief”, inflation is always at work against the purchasing power of your money. Waiting to increase contributions at an older age will require saving a greater percentage of your income.

The pension contribution ceiling limits how much you can contribute from your salary and investing huge amounts in stocks while nearing retirement is quite risky as time becomes limited. When you are young it’s easy to believe there will be enough time, but when you are nearing retirement, it can be a rude awakening. Be mindful that investing in stocks is a long-term goal. The realisation that you have not saved enough to live comfortably in retirement can cause depression and anxiety. If the pension payout received upon changing jobs was invested in a portfolio containing stocks in the early years of working, then the future would be more promising at retirement. It’s always better to live with the pain of discipline than the pain of regret. Time and compound interest, as I have said repeatedly, are key elements in the formula for creating financial freedom.

Just last week I interviewed two newly retired women who were quite happy about this phase of their lives. They are investing proceeds from their pension funds for long-term growth, whilst enjoying time in retirement as their long-awaited pensions now provide them with income for life. They can enjoy today because they expect the future to be better while they invest to beat inflation. It’s time for these hard-working women to now relax and allow their investments to work even harder for them in retirement.

At the same time, I had an interesting encounter with a self-employed man who had recently resigned from his job. He had several options to choose from concerning the group pension funds with his former employer. I was astonished that though he sought answers from his former place of employment as well as the pension fund managers about aspects of his pension benefits he was dissatisfied with their inability to address his concerns. Upon assessing the relevant documentation relating to the pension options on leaving his job, I was able to advise him on how to proceed. He was adamant that cashing out his pension contributions was not a favourable option. I was pleased that his long-term view was more important than short-term gratification. Let’s look at some pension options when changing jobs:

• Both the employer and the employee contribution can remain with the former employer until the retirement age.

• Transferring the employee contribution to a new employer pension fund or transferring funds to a personal/individual pension plan. This latter option is ideal for the employee who has become self-employed.

• Cashing out employee contributions and leaving the employer’s portion with the company. It remains invested until retirement age. Employers, however, make no further contributions to the plan.

• If the employee is vested, then both the employer and employee’s portion may be transferred to another pension plan such as an individual pension plan based on the pension vesting schedule. A vesting schedule tells when a participant or contributor to a pension plan has access to the ownership of the funds in a pension fund after completing a specified term of employment. vesting schedule is used as an incentive to encourage employees to stay with a company.

• Some superannuation plans may allow for the vested portion to also be encashed after leaving the company, based on the vesting schedule.

It’s best to consult a licensed and experienced financial advisor when it comes to making decisions on what pension options are best to pursue when leaving your job. A financial advisor can tailor-make a plan that best suits your financial goals.

Grace G McLean is a financial advisor and pension 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