With unemployment at an all-time high in South Africa, a growing number of people are considering cashing out their pension funds to cover more immediate costs.
Sherwin Govender business development manager at Glacier by Sanlam, highlights a number of scenarios one should consider before taking this step, warning that you shouldn’t rob your retired self.
Retirement savings are your money – but they belong to you when you retire, said Govender.
“Spending it now could mean that you won’t have enough saved to live on when you retire. Not having enough retirement savings means you will need to find income-generating employment after you retire.
“If jobs are scarce now, what will the job market look like when you’re 60?”
Cashing out your pension fund is taxing
Govender said that you can only cash out your pension fund if you withdraw from the fund – in other words, when you resign or lose your job.
Losing your job and retiring, however, are two different thing:
- If you retire, you can only cash out up to one-third, and the balance must be used to purchase an annuity;
- If you withdraw when you find a new job and resign, or are retrenched, you could typically transfer as much of your funds as possible to a preservation fund at a registered financial services provider. Other options would be transferring to a retirement annuity or the new employer pension fund. However, you can cash out the full amount, but the tax you pay on the cash lump sum would be more than if you retired from the fund.
The tax payable when cashing out your pension fund is calculated as follows:
- The first R25,000 is not taxed;
- The balance up to R660,000 is taxed at 18% of the amount over R25,000;
- The balance up to R990,000 is taxed at R114,300 + 27% of the amount over R660,000;
- The remainder is taxed at R203,400 + 36% of the amount over R990,000.
What you’ll be losing in compound interest
Govender warned that you’re giving up a lot of the ‘magic’ of compound interest, especially if you cash out 100% of your pension fund now.
He provided the below table an example of the financial outcomes of three people, Chris, Thandi and Dave, who all lost their jobs and withdrew money from their pension funds.
If you need the money to pay debts
“Investigate debt counselling or consolidation before dipping into any of your savings or investments,” said Govender.
“A debt management programme will help you create a debt repayment plan that gets you back onto a healthy financial path.”