When most of us think about our retirement, we consider lounging on the beach, playing with our grandkids or picking up a new hobby. Very few of us think we would still be working or struggling to make ends meet when we are in our senior years. Therefore we need to ensure we take care of our retirement funds so that by the time that we are ready to retire we will be financially comfortable to do so..
The problem however comes in as we see many South Africans typically changing jobs on average five to seven times throughout their working lives, with 95 percent of them ending up without sufficient funds when they retire. Why you may ask? A new job is an exciting change and new challenge that can mean career growth and a higher income. This means we have many clients requesting to cash out their pension funds instead of preserving them because they want to use it to pay off the debts they’ve built up in between jobs when they move from one company to the next. But what most people don’t realise is that by using tomorrow’s money to pay off debts today can ultimately have a devastating effect on their long-term retirement plan!
Every time you cash in your pension fund you blow a hole in your provisions towards your financial freedom in the future. Financial freedom takes place when your investments can provide you with a sustainable income for the rest of your life. Your pension is the most important contribution to this as it is probably the biggest investment you’ll make over the longest period of time.
WHY WE AS WEALTH STRATEGISTS BELIEVE THAT CASHING IN YOUR PENSION FUND CAN HAVE SEVERE CONSEQUENCES FOR YOUR RETIREMENT:
Firstly, it costs you more than you realise...
Assuming you save with 30-years to retirement and you cash in after the first 10 years. The monthly amount needed to catch up to the same value at retirement is three times. If you cash in after 20 years, the amount needed to catch up is ten times. You also give up tax payable to SARS which if left in your fund boosts the compounding effect on your money. The bigger the amount the bigger the compound over time.
Secondly, the cost of living...
If you cancel your pension to pay off debt then you ultimately just delaying dealing with the problem at hand. Having too much debt in the first place is a result of you living beyond your means or budgeting properly. Cashing in your pension is effectively turning off your income at retirement. If you cannot afford your lifestyle now whilst you are earning a salary you certainly won’t afford to live the same way when you retire. You need to look at paying off your debts with the income you earn after savings. It’s the only way to arrive at financial freedom into the future.
Thirdly, protected investment...
Your retirement funds are untouchable and belong to you only, which means your creditors cannot touch the money. This is a useful consideration for those wanting to go into business for themselves and intending to cash in their pension fund as an investment into their business. You would do well to use the banks money instead of yours. You get the best of both worlds. You retirement funding stays on track and if the business goes bust then you still have your funds for the future
Without a doubt our advice to clients when leaving your job is to rather move your pension/provident fund money into a PRESERVATION FUND rather than cashing it out!!!
WHY A PRESERVATION FUND AND WHAT ARE THE BENEFITS OF KEEPING YOUR RETIREMENT SAVINGS IN THIS TYPE OF FUND?
A preservation fund is a retirement fund in terms of the Pension Funds Act. Preservation Funds are a popular vehicle for preserving retirement savings and avoiding tax penalties when you change jobs or retirement schemes. You may transfer the proceeds of your pension or provident fund to a preservation fund in the event you are dismissed, retrenched, or you resign. Doing so preserves both your accumulated savings and the attached tax benefits.
You can invest the proceeds from different pension or provident funds in either one or multiple preservation funds. You cannot however split the proceeds from one pension or provident fund across different preservation funds. You cannot make contributions to your preservation fund from other sources. Your investment will thus only grow in line with its net investment return.
KEY BENEFITS OF USING A PRESERVATION FUND:
Access to Cash
Preservation funds allow you to take part of your retirement fund benefit as cash - after you pay the tax - and then transfer the balance tax-free to the fund. You are then allowed to make one further withdrawal - either part of your savings or all of it - from that fund before retirement.
The state has a vested interest to stop you cashing in your retirement asset early and provides tax incentives, to keep you saving. Your transfer to a preservation fund is tax exempt provided you move your savings from a pension fund to pension preservation (or RA) fund, or from a provident fund to a pension or provident preservation (or RA) fund. You also do not pay tax on the returns earned by your preservation fund and when you do draw your savings on retirement, you are taxed at favourable rates. These concessions fall away if you cash in early.
The primary objective of your pension or provident fund is to build sufficient wealth to sustain you once you retire. This wealth is built through your contributions and the return earned by your investments. To build sufficient wealth, you need to save diligently over the course of your entire working life. If you fail to preserve, you not only forgo your savings to date, but also the return these savings would have generated up to your retirement date.
You can transfer your preservation fund tax-free to another preservation fund, or to an RA, or to your employer’s retirement fund. Currently, you cannot transfer a pension preservation fund to a provident or provident preservation fund
It keeps your money safe. No matter what happens to your other finances, the money you preserve is safe from creditors.
While cashing out a large sum of money from your pension fun may be tempting, its not worth doing in the long term. Rather ensure you invest wisely in your retirement, get the best possible return for your money and remember the objective behind your Retirement Savings is to support you financially at retirement.
If you would like to chat about various options to preserve your pension / provident fund money or any other form of retirement provision, then give one of our Wealth Strategists at Capta FS a call today!