John, a 37-year-old production manager who is facing the possibility of being retrenched, has recently approached me for options relating to his retirement funds, says Pieter Willem Moolman.

He is married with two children and not sure when he will find alternative employment. He is considering using the proceeds of his retirement fund to settle his bond.

If we consider that only seven out of every 100 South Africans are able to retire independently and, further, that one of the main reasons for insufficient capital at retirement is that funds are not preserved in the event of a job change, it is crucial that John pays careful attention to this decision.

While the above option may seem wise as it will reduce his current expenditure during his job search, it may spell disaster in respect of his retirement planning. By taking the cash, he will be taxed on the proceeds.

Only the first R22 500 is tax-free, with the balance being taxed on a sliding scale, which means that a substantial portion of his hard-earned retirement funds will be lost.

If John considers preserving his funds, he could consider transferring the proceeds to a so-called preservation fund, which is geared towards protecting the value and nature of your pension or provident fund.

The main difference between a pension and provident fund is that the former only allows you to take up to one third in cash (subject to tax), while the balance has to fund a lifelong annuity that will provide you with an income.

John will not pay tax upon transferring his retirement fund to a preservation fund and will have a wide investment fund choice available to ensure that his money continues to grow until he retires.

He will not be able to make further contributions to the fund, but can choose to use a new vehicle to channel future contributions.

An important aspect of a preservation fund is that you will have one opportunity to make a full or partial withdrawal before retirement. Such a withdrawal will, of course, also be subject to tax.

Another option John has is to transfer his existing retirement fund tax-free to a retirement annuity (RA), of which only a third is available in cash at retirement.

It is important to remember that neither one of these vehicles will provide better investment growth than the other. They are simply different options with different rules applicable at retirement and relating to withdrawal options.

In the case of an RA, it is important that John realises he will only have access to the funds once he turns 55. For some this protection is important, because it will prohibit them from squandering their retirement money.

Other investors may however feel more comfortable knowing that they have access to their funds in the case of an emergency.

Pieter Willem Moolman is the owner of PWM Financial Management in Port Elizabeth. Visit or phone 041 582 3034.