I’m thinking about resigning so I can cash out my pension and rather invest the funds myself. What are the pros and cons of doing this?

Maya’s Answer

Some people feel more in control if they can manage their own investments, however, this is not necessarily a good strategy.

Firstly, if you cash out your pension, you would pay a significant amount in tax once you withdrew the funds. This is subject to a withdrawal tax table. According to the table, the rate of tax increases based on the amount withdrawn.

For example, on R1 million you would pay just under R200 000 in tax. That is an immediate loss of almost 20% of your lifetime savings which you are unlikely to recover in above-average returns.

Once you have withdrawn funds from a retirement vehicle, all growth (including interest) becomes taxable and could increase your taxable income, depending on how it is invested.

Watch: Should you cash out your pension?

Secondly, if you withdraw these funds, they become part of your estate, unlike your retirement fund. As retirement funds are not included in your estate, the value is not included in the calculation for executor fees – which can be up to 4% of the value of your estate.

Retirement funds do not attract estate duty, but they are taxed according to retirement tax tables on a sliding scale from 18% to 36%. Alternatively, your beneficiaries could opt to purchase an annuity income and only the income would be taxed in their hands. Retirement funds are also protected from creditors.

Finally, individuals are not great at managing their own money.

Research has proven that most investors who manage their own money have significantly lower returns than professionally managed funds.

We tend to get caught up in short-term noise and allow emotions to take over. We tend to chase market returns and attempt market timing. We are also more likely to fall for scams, as the recent BHI Trust ponzi demonstrated.

Leave your retirement funds to grow in a secure investment and rather start an investment outside of your company fund and boost your investments that way.

Further reading: Think before you plunder your retirement fund

This article first appeared in City Press.