“Cashing out your pension fund when you change jobs or resigning to access your pension fund may seem like a quick cash-flow fix but, in actual fact, you are crippling yourself,” advises John Manyike, Head of Financial Education at Old Mutual Limited.
Risky financial manouvres of this nature tend to do more harm than good as cashing in your pension borrows from your future and sabotages your financial wellness in retirement.
Retirement funds provide means for employees to save for their retirement years. However, only about 6% of South Africans can maintain their standards of living in retirement. To compound the problem, due to high costs of living and rising debt, fund members are increasingly looking to access their retirement funds as a solution.
“Working during our earning years may provide a decent lifestyle, but often will not secure a decent retirement. This is generally due to a lack of discipline and proper financial planning, we need to remember that when we retire, our bills don’t retire with us” says Manyike.
While there are many ways to save for retirement, e.g. starting a business to sell or building a rental property portfolio to generate annuity income, pension funds make up a large portion of retirement savings.
Unlike in many other countries, members of pension funds in South Africa can access pension benefits before retirement. Unfortunately, many choose to do so without fully understanding the effects these early withdrawals have.
“Not only is the amount of money available at retirement reduced, there are also severe tax consequences,” explains Manyike.
Below are 5 key things to consider before handing in your notice or changing jobs to access your pension fund:
- Do your homework before you jump ship – lest you jump into a company on the verge of retrenching staff few months after you join them.
- Explore the opportunities at your current workplace. Could new doors open for you if you sharpen your professional skills, invest in your personal development, upgrade your technology skills or complete an educational course, or perhaps take on more responsibilities if you can?
- Don’t get tempted by a ‘big’ salary. Make sure you are comparing apples with apples. Look at other benefits that your new company is offering.
- Consider the physical location of the new employer. Commuting costs to and from work could vanquish your additional income.
- Speak to your financial adviser to review your financial plan, taking into account your prospective increased income and financial obligations.
If you’re tempted to resign to access your retirement fund and use the cash payout to help fund your living costs or pay off your debts, think again.
You have to consider the reason you are in debt, usually it is an unhealthy relationship with money and a lifestyle you can’t support, says Manyike.
A budget will ensure you do not live beyond your means and will ultimately keep you from stealing from your future when you are too old to earn an income. Resist the pressure to have the same material things as the people around you and even the people on television. You may be able to use credit cards and loans to fake wealth for a short period of time, but you’ll pay for it later, and you’ll end up paying more.
Your aim should be to retain at least 70% of last salary to maintain the same standard of living in retirement.
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