Nelson wants to cash in his pension in the hope that he can invest it for better returns.

“I have been employed by the government for about 20 years. Recently the government sent a letter showing the amount I would receive if I retired, resigned, died or was discharged due to ill health. My resignation amount is R1,2 million.  I am nearly 50 and thinking of resigning in 2020 to invest the money myself instead of receiving a monthly income from government. Is that a wise move? ” writes Nelson

Financial planner Craig Gradidge replies:

The government fund is a defined benefit scheme in that it would provide a guaranteed income in retirement, but you would be able to extract a lump sum instead and invest the funds. The fund does not fall under the ambit of the Pensions Fund Act and is governed by a different set of rules.

The government fund is, however, like any other retirement fund in that the investment complies with Regulation 28. This means the funds have to be invested in certain assets to lower the risk of the investment and you can expect an annual return of about 5% above inflation going forward (around 11% at the moment).

By 2020 the investment would be expected to be worth R2 million due to growth and continued contributions. While that may sound like a large amount, it has to last you at least another twenty years in retirement and is therefore only able to buy a sustainable monthly income in the region of R10,000 a month.

It would be preferable to leave the funds there for as long as you remain employed. Be careful of considering taking the funds out as part of a resignation rather than retirement because a R2 million withdrawal will attract tax of over R500 000.

You can consider options closer to retirement as there are too many variables at play to provide a proper financial analysis. I strongly advise you to see a financial adviser closer to the time before making any decisions. Given that retirement reforms will be in place before 2020 a lot could change that impacts on any decisions you may want to make.