According to Stats SA, the unemployment rate was around 29.1% in the third quarter of 2019. Some argue that it’s closer to 36%, which equates to around 10 million working-age South Africans. Nobody knows for sure what the actual count will be in 2020 in the context of COVID-19. Losing your income may have been out of your control, but the next steps you take are – and they could dictate your future financial health. Sherwin Govender, Business Development Manager at Glacier by Sanlam, suggests five things to consider before you cash in on your pension fund.
1. Don’t rob your retired self
Retirement savings are your money – but they belong to you when you retire. 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?
2. Cashing out your pension fund is taxing, literally
You can only cash out your pension fund if you withdraw from the pension fund i.e. when you resign or lose your job. Losing your job and retiring, however, are two different scenarios:
- a. If you retire, you can only cash out up to one-third, and the balance must be used to purchase an annuity.
- b. 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; and
- The remainder is taxed at R203 400 + 36% of the amount over R990 000.
3. Consider all the money you will be losing in compound interest
You’re giving up a lot of the ‘magic’ of compound interest, especially if you cash out 100% of your pension fund now. In the table below is 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:
4. If you need the money to pay your debts, consider other options first
Investigate debt counselling or consolidation before dipping into any of your savings or investments. A debt management programme will help you create a debt repayment plan that gets you back onto a healthy financial path. Sanlam offers free debt management assistance; visit our Credit Profile page for more details.