We should value our retirement funds as much as we do our homes
Last week I received an email from a reader who was falling behind in her debt repayments. Her only solution, she believed, was to resign from her job in order to access her pension fund to settle her debts. She had not even contacted her credit providers, the National Debt Mediation Association or sought the assistance of a debt counselor. Her first thought was to raid her retirement provision, leaving her not only vulnerable in her later years but unemployed at a time where we have an unemployment rate of 25% and the prospects of her finding another job are negligible.
Trustees of pension funds tell us that people are even getting divorced to access their nest eggs and we know from retirement surveys that 70% of people changing jobs and 90% of people retrenched cash in their retirement funds.
“If I had one wish it would be that people valued their retirement fund savings as they would house ownership,” says Piet Spreeuwenberg, Client Services Manager at Old Mutual who adds that when people resign from their job they will defend their house, few would ever think of drawing cash out of their home loan to pay for living expenses yet the majority of cash in their hard earned savings with little thought. Retirement funds take time to build up and they are your only guarantee that one day you will be able to stop working and enjoy a reasonable lifestyle
“Would you sell your home to meet your debts or would you find every way and alternatives to keep your home? Why not have the same attitude to your retirement fund?” asks Spreeuwenberg.
Five reasons to preserve your pension
Protection from creditors: People may cash in their retirement fund to pay off their house or settle debts – yet they have removed the one protection they do have from creditors. Unlike your house no one can ever attach your retirement savings – they are protected by law. You may lose everything but your retirement money is safe.
The gift that keeps giving: Even if you stop contributing to the fund, it will continue to grow just like renting out a property – it keeps producing returns, but unlike property there are no maintenance costs or levies or property tax. Based on an annual return of 10%, your pension will double in value every seven years.
You will need to save less: If you start saving 15% of your salary from age 25 and then cash it in at age 40, you would have to save a massive 43% of your salary each year to be in the same position in retirement if you preserved your funds and continued to save just 15%.
You save tax: When you cash in your pension, you will pay tax on any amount over R22 500. It also affects your tax-free withdrawal on retirement. Although you are entitled to withdraw R300 000 tax-free at retirement, it is a lifetime concession so it takes previous withdrawals into account. You also pay no interest or dividend tax on retirement funds and there is no capital gains tax payable.
You can afford to retire: The first twenty years of contributions account for 60% of your retirement benefit. So if you cash the funds at the age of 45 it would be impossible for you to catch up this short-fall over the remaining years of work.
How to preserve your retirement fund
- Find out if your existing fund offers a preservation option that allows you to leave your funds with them. This is usually available only in large company funds.
- Transfer your accumulated credit to a preservation fund. The money can be left in the preservation fund until retirement and has no tax implications.
- Transfer the accumulated credit to the new employers’ pension/provident fund. This option has no tax implications but is only possible if you are transferring from a pension fund to another pension fund or from a provident fund to another provident fund.
- Transfer it to a retirement annuity fund. This option has no tax implications.
This article by Maya Fisher-French first appeared in City Press.