You should not treat your retirement fund as an ATM
In these current market conditions, if you have a job, hold on to it. This is logical. However, there is a new trend on the rise – financially desperate people resigning from their jobs without new ones lined up, just so they can access the money saved in their pension funds.
The size of the unemployment problem
It seems logical, especially in light of the current unemployment statistics – if you have a job, try not to lose it. According to Stats SA, the unemployment rate was around 29.1% in the third quarter of 2019. Some argue that it’s closer to 36%, which equates to around 10 million working-age South Africans.
Nobody knows for sure what the actual count will be in 2020 in the context of Covid-19. As a result of the pandemic, the subsequent market turmoil in its wake, and the unrelated investment downgrade that followed, many industries in South Africa will shrink this year. It is likely that many companies in those industries will close and thousands of jobs will be lost. These numbers provide a stark reminder that jobs are scarce and finding a new one will not be easy if you lose the one you have.
Steer clear of your pension fund
When you resign from your job, you are allowed to cash out the total of the savings accumulated in your employer’s pension fund, but you will pay a hefty sum in taxes. The tax laws around cashing out your pension fund are in place to dissuade you from doing so, and with good reason.
You may be financially desperate, but here is a summary of why you need to stay put in the job you have, and step away from your pension fund:
Don’t play Russian Roulette with your financial future. Resigning from your job purely to access your pension comes with huge risks and costs. There is way too much uncertainty in the job market, so don’t be confident about getting hired elsewhere soon. Also, consider what resigning could mean for you and your family if you are a breadwinner.
Don’t rob your retired self. Retirement savings is your money, but it belongs to you when you retire. Spending it now could mean that you won’t have enough saved to live on when you retire. Not having enough retirement savings means you will need to find income-generating employment after you retire. If jobs are scarce now, what will the job market look like when you’re 60?
Cashing out your pension fund is taxing, literally. You can only cash out your pension fund if you withdraw from the pension fund i.e. when you resign. Resigning and retiring are two completely different scenarios.
- If you retire, you can only cash out up to one-third, and the balance must be used to purchase an annuity.
- If you withdraw, (when you find a new job and resign), you could typically transfer as much of your funds as possible to a preservation fund at a registered financial services provider. Other options would be transferring to a retirement annuity or the new employer pension fund. However, you can cash out the full amount, but the tax you pay on the cash lump sum would be more than if you retired from the fund. The tax payable when cashing out your pension fund is calculated as follows:
- the first R25 000 is not taxed;
- the balance up to R660 000 is taxed at 18% of the amount over R25 000;
- the balance up to R990 000 is taxed at R114 300 + 27% of the amount over R660 000; and
- the remainder is taxed at R203 400 + 36% of the amount over R990 000.
Consider all the money you will be losing in compound interest. You are giving up a lot of the “magic” of compound interest, especially if you cash out 100% of your pension fund now. In the table below is an example of the financial outcomes of two people, Chris and Thandi, who both have resigned and withdrew money from their pension funds
If you need the money to pay your debts, consider other options first. Investigate debt counselling or consolidation before dipping into any of your savings or investments. A debt management programme will help you create a debt repayment plan that gets you back onto a healthy financial path.
Look at your big financial picture with a qualified friend. It’s human nature to make financial decisions that seem good now but turn out to be regrettable in future. Seek financial advice from an accredited financial adviser to guide you through difficult financial times.
Sherwin Govender is a Business Development Manager at Glacier by Sanlam