Think twice before raiding your pension even if it's a last resort

Make wise, not easy choices to avoid robbing your future self

Resigning and cashing in your pension is a very drastic step you should not resort to unless all else fails.

Desperate times should not tempt you to plunder your retirement savings. Picture: 123RF/ISAINCUZ
Desperate times should not tempt you to plunder your retirement savings. Picture: 123RF/ISAINCUZ

Resigning and cashing in your pension is a very drastic step you should not resort to unless all else fails. 

Recently Sowetan reported that delays in the payment of the Unemployment Insurance Fund Temporary Employer/Employee Relief Scheme (Ters) benefit caused a bus driver with no income and a family to provide for, to resign his job to access his pension savings. 

It may be that the driver had exhausted all his options and it was the last thing he could think of to do. 

But if you are struggling financially first explore all your other options. Do not regard your retirement savings as an easy source of funds to plunder because you have holes in your budget. 

Cut your expenses first, then negotiate with credit providers and consider all the ways in which you can realise money, like selling a car or downgrading where you live before you turn to your retirement savings.

There are good reasons why.

1. Resigning your job is a very risky thing to do at this time. The economy is shrinking and companies are cutting costs by shedding jobs. Millions of South Africans are expected to lose their jobs over the next few months with predictions ranging from 40% to 50% unemployment. Resigning your job could leave you without work for many a month.

2. Accessing your pension may not be a quick way to get cash. Your retirement fund will have to get a directive from the South African Revenue Service about how much tax to deduct and this could take some time. Vickie Lange, head of best practice at Alexander Forbes, says at best it will take five to 10 days after you leave your job for you to get paid as long as all the information has been provided, all the forms are complete, all your contributions have been paid over to the fund and there are no tax issues. Worst case scenario it can take up to six weeks, she says.

3. You may be taxed on the money you withdraw. When you resign, you are only able to withdraw R25,000 tax free. The rest of your money will be taxed at rates starting at 18%  - close to one in every R5 - and increasing depending on how much you withdraw, up to 36%. You can only avoid this tax by withdrawing just the R25,000 and transferring the rest of your savings to a retirement annuity or preservation fund, but that will mean tying up the money until you retire. Preservation funds allow just one withdrawal before retirement while retirement annuities only allow access after age 55 or on ill-health.

4. The tax you pay when you withdraw from your fund is not the only tax implication. If you don’t ever withdraw your retirement savings before retirement, when you retire you will be able to withdraw up to R500,000 free of tax. But if you withdraw your savings before retirement, the amount you withdraw will reduce the amount you can draw tax free at retirement. 

If, for example, you withdraw R300,000 from your retirement fund when you resign, when you reach retirement you will only be able to withdraw R200,000 tax free because you already took R300,000 out.

If you have not withdrawn any of your retirement savings before and you get retrenched, you would be entitled to take R500,000 tax free and thereafter tax would start at 18% and increase for amounts above R700,000 and again above R1 million. 

But if you have already taken R300,000, you will only be allowed R200,000 tax free on retrenchment or retirement and on any amount above that the 18% tax rate applies. Above R400,000, you will pay tax at 27%.

5. Not only will you potentially pay tax on your savings, but you will pay hugely in lost compounding on your savings. Consider this case:   

Assume you started at age 25 saving R300 a month in your retirement fund and your employer contributed another R300. Assuming you earned returns that were four percentage points higher than inflation – so 8% when inflation is 4% as it is now, at age 60, you would have saved R3.27m. 

But assume that you did that and you are now 40. Your savings only amount to R316,000 and you think it is okay to draw it out because you are having some financial difficulties. 

If you start again saving R300 a month with your employer contributing another R300, by age 60, you will only have R605,000 saved – more than five times less than if you had not withdrawn the money at age 40. 

That is the power of compounding that you lose by not preserving.

Some people are facing desperate times, but if you have other options - make wise, not easy choices.