Debt is the main reason people withdraw their retirement benefits when changing jobs, according to key findings of the 2015 Sanlam Benchmark Survey, a comprehensive annual review of South Africa’s retirement industry.

After interviewing thousands of retirement fund members and pensioners, the survey found that where people had withdrawn retirement funds when changing jobs, 63% cited debt as the reason. Around 57% of pensioners had used a portion of their withdrawal benefits to reduce debt.

South Africa does not have a strong culture of saving and Mayuri Reddy, marketing strategist at Sanlam Employee Benefits says: “With debt being easy to acquire in South Africa, people are taking advantage of the option to have extra cash at hand. Unfortunately they don’t realise the true cost of the debt they undertake.”

Earlier this month a World Bank report found that South Africans were the biggest borrowers in the world with 86% of South Africans admitting they had taken out a loan during 2014.

“One of the key takeouts from this year’s results is the disconnect between the perceived reality and the actual reality. 87.7% of members believe that they have their debt under control, but the numbers clearly state the opposite. Both members and pensioners perceive hurdles such as debt and withdrawal as a small, short-term decision with a small impact, however, it is this misperception that hampers them in the long run,” says Reddy.

Lack of understanding

What is concerning is that retirement members don’t fully understand the impact of drawing on their retirement funding to pay off debt. The Benchmark Survey found that of the members who used withdrawal benefits to reduce debt, less than half understood the level of tax to be paid on the withdrawal benefit while 45% did not realise the effect the withdrawal benefit would have on their overall retirement outcome. More than a third regretted the decision to withdraw. For example if an individual withdraws their retirement funds at the age of 30 they will reduce their income in retirement by around one third.

The research has once again singled out the lack of preservation, the simple act of reinvesting your cash in a retirement savings vehicle upon early withdrawal from your pension fund, as a major threat to retirement outcomes for savers.

Many instinctively withdraw as much cash as they can from their accumulated savings without considering the trade-off between taxation on the withdrawal versus the additional level of income they can secure in an annuity. “Employees do not understand the consequences of cashing out their retirement funds while, employers are not doing enough to educate them about the implications,” says Viresh Maharaj, chief marketing actuary at Sanlam Employee Benefits.

Many young employees cash in their retirement benefits simply because it is too complicated to preserve the funds as the former employer is not interested in assisting.

“Assuming that you change jobs every five years you could end up with as much as 16 times more capital upon retirement by simply preserving your savings rather than withdrawing the cash each time,” says Maharaj.