Beware when cashing out your retirement savings

For people in the process of moving to a new company, it’s important to remember that a clean break does not necessarily mean destroying what you have built up, including any savings towards retirement.

When moving jobs, it can be confusing to know what to do with any retirement savings you’ve accumulated through your employer.

Some see it as an opportunity to cash out a lump sum for an instant bonus, perhaps for a holiday or a down payment on a new car.

But such a decision will probably be financially devastating in the long run.

Chris Eddy from 10X Investments, said: “When you change jobs and cash in your pension, you not only lose your accumulated savings, but also the return you would have earned on those savings for the rest of your working life. Over 20 or 30 years that amounts to a significant loss.

“Also, it is very difficult to make up this shortfall in later life. Those years’ worth of savings are essentially gone forever.”

Eddy suggests that even if you find yourself in financial difficulty and feel you have no choice but to dip into your retirement savings, “it’s better to cash out only a small portion and save the rest for the long-term”.

Not preserving is very popular in South Africa – between 70% and 80% of fund members have at some point cashed in their savings on changing jobs. Cashing out will also expose you to hefty tax fees.

Only R25,000 withdrawn before your retirement date is tax-free; anything more is taxed at 18% or more.

Instead of “going for broke” with your hard-earned savings it’s wise to transfer whatever you have accumulated in your provident or pension fund to an alternative retirement savings fund, such as a preservation fund, where it has the chance to continue growing.

“This way you will benefit from compound interest, where you earn interest on top of interest already earned in a snowball effect of growth over time,” Eddy said.

Although it may be tempting to cash out your savings, particularly after such a financially challenging year as 2019 and amid the rising cost of living this year, resisting the urge will take your savings to the next level.

“Seeing your final balance statement of tens of thousands or even hundreds of thousands may be extremely tempting when you have so many bills and fees to pay and debt to pay off, but you should look at your retirement savings as precious – sacred in fact.”

Eddy said that when retirement comes, people who cashed out when they moved jobs will come to appreciate that the term ‘preservation’ refers not just to their savings, but also to their standard of living.


Read: Are you confident about your retirement savings?

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Beware when cashing out your retirement savings