Any changes relating to early access to funds in a private-sector pension fund or RA will have no bearing on members of the GEPF.
I have received many queries from readers about the proposal to allow members of retirement funds limited access to their retirement funds due to the COVID crisis. There is also a Bill proposed by a member of parliament to allow members whose funds are governed by the Pension Funds Act (PFA) to use their pension funds as collateral to borrow money.
While details of all these discussions are still to be released, it is important to note that this does not have any bearing on members of the Government Employees Pension Fund (GEPF).
The GEPF is not a private-sector fund and is governed by the Government Employees Pension Law (1996) which can only be amended by parliament. It is not governed by the Pension Funds Act (PFA) and any announcements or changes relating to the Pension Funds Act will have no bearing on members of the GEPF.
This applies to all proposals around retirement reform in respect of the Pension Funds Act, including annuitisation. It is important when reading about retirement proposals in the media that GEPF members differentiate between changes made to funds in the private sector versus what is applicable to GEPF members as per the Government Employees Pension Law.
Unfortunately, some financial advisers are also not aware of this difference and may provide incorrect information.
No withdrawals, no cash advances
As it currently stands the GEPF does not allow any withdrawal from the pension fund while employed, nor does it allow members to use their GEPF funds as part of any pension-backed home loan scheme.
It does not allow cash advances or loans from the fund as the fund is not a registered Financial Service Provider so it would be against the law to allow loans from the GEPF.
It is also important to note that the GEPF is a defined benefit fund. As explained in a previous article, the GEPF and the employer, being the State, guarantees the members’ benefits in retirement. These benefits are not based on the value of the fund at retirement but on years of pensionable service and final salary calculations.
It would be a challenging actuarial calculation to work out the impact on years of service if funds were advanced, or if a creditor demanded payment when the funds were used as collateral for an unpaid loan.
Members have already experienced the challenge in accounting for retirement benefits paid to former spouses as part of a divorce settlement.
What concerns me as a financial educator is the extent to which people view their retirement funds as a quick solution to financial challenges without understanding the long-term consequences of depleting retirement funding.
Ask any member who experienced a reduction in their pension benefits due to divorce agreements about the consequences of being underfunded at retirement. Unless they used the GEPF mechanism to buy back years of service, they have insufficient income on retirement and have limited options in how to support themselves in retirement.
Rather than cashing in valuable retirement assets, create a debt repayment plan using the snowball effect. This is where you target one debt at a time.
Let’s assume you have multiple credit facilities and owe a total of R50 000. You have done your budget, cut some spending and freed up R1 000 to use to pay off debt.
- Retail store account R3 000, current repayment R300 per month
- Clothing account R7 000, current repayment R500 per month
- Personal loan owing R10 000, current repayment R650
- Bank credit card R30 000, current repayment R2500 per month
Month one: Increase the retail store repayment by your R1 000 to R1 300. Paid off in three months.
Month Four: Take the R1 300 you used for the retail store account and add to the clothing account to increase repayments to R1 800. Paid off in three months.
Month nine: Take the R1 800 from the clothing account and increase your personal loan repayments to R2 450. Paid off in three months.
Month 12: Take the R2 450 from your personal loan repayments and hit that credit card with R4 950 per month. Your credit card will be fully paid off in six months.
You have just paid off R50 000 worth of debt in 15 months, with just R1 000 out of your budget. Remember this only works if you close down the credit facilities as you pay them off, otherwise you will just go back into debt.
You now have no short-term debt and nearly R5 000 to start investing – all without relying on a windfall. If you are struggling to repay your debts and find yourself over indebted, you may need to consider debt review.
This article was sponsored by the GEPF.