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The true cost of cashing in your pension

Mar 3, 2021

The true cost of cashing in your pensionHave you heard of the term Sdudla? I recently came across it in relation to members of the GEPF, specifically members who are teachers and nurses.

This is the practice of resigning from your post to access your pension fund. As teachers and nurses can work as contractors, many quit their jobs, take their pension balance and then work on contract for a few years before rejoining the department.

I received insight into the practice of Sdudla from chatting to my Facebook followers. One person wrote, “I know teachers who have done it. They resign to access their pension funds and then re-appy after a while.”

Another wrote “It is quite popular with teachers and nurses although also with other government employees.”

Some warned against the practice: “I know of friends that have done so and now are struggling at retirement.”

Others informed me that getting divorced to access their pensions is becoming even more popular. “Nowadays the ‘divorce’ method is proving more popular and is done by quite a variety of government employees with the sole purpose of accessing their pension funds,” said one contributor, but as another warned, this is a risky strategy.

“I know a couple that divorced to access the man’s pension. After they got the money and started spending, they never remarried. The husband just didn’t want to and now the money is gone, spent by the two of them. Eventually they separated.”

And that is exactly the point. So many of the teachers and nurses who have played the Sdudla game get to retirement age and then find that the money is gone and they have nothing left for their retirement.

In fact, the name Sdudla is quite apt: it means “I am not going anywhere, I am just spinning.” It is derived from a car sport where a driver revs up the engine as if driving away, only to swerve the steering wheel and the car drives in circles, leaving tyre marks depicting the figure eight. It may look impressive, but it is certainly not moving anyone forward physically or financially.

Financially destitute

The problem is that this behaviour is leaving many teachers and nurses financially destitute when it comes to retirement. Sdudla is not a wise decision. It often ends in hardship once retired.

Let’s look at a hypothetical comparison of twins Martin and Lebo, who both start their careers as teachers at the age of 25. Martin uses the Sdudla strategy during his career and Lebo stays as a fully employed teacher until the age of 60.

Suppose Martin and Lebo join the GEPF at the starting pensionable salary of R208 000, and they are eligible to receive annual progression increases. If Martin leaves his position and rejoins the same position later, we assume that his starting pensionable salary at each age will only have grown by 5% p.a. – an increase in line with inflation. For simplicity, we are assuming no promotion or change of positions and Martin and Lebo join the same position.

Martin works as a teacher from the age of 25 and then at 30 resigns to access his pension. The final salary at age 30 (the average last two years’ salary before resignation) will be R294 240.

Payout: At the age of 30 when Martin resigns, his resignation benefit is R301 923. He will pay R49 846 in tax and take home R252 077.

He works on contract for five years before joining the department again at the age of 35. He works as a teacher until age 45 – so another 10 years and again resigns to access his pension. His final salary at age 45 would be R565 683.

Payout: At the age of 45 when Martin resigns, his resignation benefit will be R1 182 148. He pays R272 574 (around 23%) in tax and takes home R909 575.

Martin works on contract for two years and rejoins the department at age 47. He works another 7 years until age 55 and then resigns. He takes his benefit, and works on contract until age 60. His final salary at age 55 would be R921 438.

Payout: At the age of 55 when Martin resigns, his resignation benefit will be R1 812 777. He will pay R499 599 in tax and take home R1.3 million.

In comparison, Martin’s twin sister Lebo started working as a teacher at age 25 and stays in her employment until retirement at age 60. Her starting salary is similar to Martin’s, R208 000, however she receives above-inflation increases due to her years of service.  Therefore, at retirement, Lebo’s final salary would be R1 427 942.

Her payout at retirement: Lebo’s gratuity benefit will be R3 358 782 and in addition, she receives an annuity benefit of R75 760 per month.

The comparison

The total lump sum benefit that Martin had received from the fund before tax is R3 296 849. He receives no annuity benefit per month. On the other hand, the total lump sum benefit that Lebo will receive is R3 358 782 and R75 760 annuity benefit per month. In order to purchase an annuity income of R75 760 Martin would need R12.5 million. Even if Martin had invested some of his resignation benefits, it is unlikely he would have R12.5 million to purchase an annuity.

The cost of cashing in your pension

  • If Lebo lives for five years receiving the monthly annuity, her total benefit before tax would be R7 904 390 (excluding pension increases), and if she was married and has children under the age of 18, her beneficiaries are eligible for a pension when Lebo passes away.
  • If Lebo passes away within the first five years of receiving her pension, her beneficiaries will receive a death benefit that is equivalent to the remainder of her monthly pension.
  • She is also eligible for a funeral benefit, together with her spouse and eligible children.

Martin’s spouse and children don’t receive any benefits. In fact, Lebo will probably have to support Martin in retirement! At age 55 it would be too late for Martin to start trying to catch up his pension.

Also note that apart from a far having worse pension outcome, Martin would also have earned a lower salary than Lebo. Government positions are structured where each position has different grades.  Those who leave and re-join the same position start at a first grade (which would only have inflationary increases). This is why Lebo’s final salary is higher than Martin’s.

Be very careful of playing the Sdudla game. The long-term consequences are not reversible.

Disclaimer: The assumptions used are for illustration purposes. The figures reflect inflation so R1.3 million in 30 years’ time does not have the same buying power as it does today.

This article was sponsored by the GEPF.

2 Comments

  1. Hi, I don’t know if it’s FYEO or public consumption, if so hide my ID.

    I’m a teacher, age 55, been teaching for 30yrs. My question, what is the best option upon retirement age 60 and above, to take all your money or leave some to receive monthly

    Reply
    • The annuity you receive from GEPF is at a much better rate than you could purchase in the private sector. You cannot actually take the full amount unless you resign and then transfer to a preservation fund. That all comes with additional costs. It may make more sense to take the gratuity – invest that – and then know that you have the guaranteed income for life.

      Reply

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Maya Fisher-French author of Money Questions Answered

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