In these current market conditions, if you have a job, hold on to it. This is logical. However, there is a new trend on the rise – financially desperate people resigning from their jobs without new ones lined up, just so they can access the money saved in their pension funds. We weigh in on this scary development and examine its related financial dilemmas.
The size of the unemployment problem
It seems logical, especially in light of the current unemployment statistics – if you have a job, try not to lose it. 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.
With so much turmoil globally, and local economic challenges that simply don’t seem to be improving, many companies across industries, are either shrinking their employee numbers or closing completely. Either way, thousands of jobs are being lost. The increase in retrenchments is a stark reminder that jobs are scarce and finding a new one will not be easy if you lose the one you have.
Steer clear of your retirement fund
When you resign from your job, you are allowed
to cash out the total of the savings accumulated in your employer’s pension fund,
but you will pay a hefty sum in taxes. The tax laws around cashing out your
pension fund are in place to dissuade you from doing so, and with good
reason.
You may be financially desperate, but here is a
summary of why you need to stay put in the job you have, and step away from
your pension fund:
Don’t play Russian Roulette with your financial future. Resigning from your job purely to access your pension comes with huge risks and costs. There is way too much uncertainty in the job market, so don’t be confident about getting hired elsewhere soon. Also, consider what resigning could mean for you and your family if you are a breadwinner.
Don’t rob your retired self. Retirement savings is your money, but it belongs 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?
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. Resigning and retiring are two completely different scenarios.
If you retire, you can only cash out up to one-third, and the balance must be used to purchase an annuity.
If you withdraw, (when you find a new job and resign), 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.
Consider all the money you will be losing in . You are giving up a lot of the “magic” of compound interestCompound interest is the interest that you earn on interest. It’s basic math, really: if you have R100 and it earns 5% interest each year, you'll have R105 at the end of the first year. At the end of the second year, you'll have R110.25. Not only did you earn R5 interest on the initial R100 capital, you also earned R0.25 in interest on the R5 interest. Compound interest is the interest that you earn on interest. It’s basic math, really: if you have R100 and it earns 5% interest each year, you'll have R105 at the end of the first year. At the end of the second year, you'll have R110.25. Not only did you earn R5 interest on the initial R100 capital, you also earned R0.25 in interest on the R5 interest. , especially if you cash out 100% of your pension fund now. In the table below is an example of the financial outcomes of two people, Chris and Thandi, who both have resigned and withdrew money from their pension funds
Chris
Thandi
Age at resignation
45 years
45 years
Employer pension fund value
R1.5 million
R1.5 million
Amount cashed out
R1.5 million
R20 000
Tax paid on cash-out
R387 000
R0
Amount transferred to preservation fund
R0
R1 480 000
Age when contribution to the new employer pension fund starts
46 years
46 years
Monthly contribution to a new employer pension fund
R2000
R2000
Growth rate
10% p.a.
10% p.a.
Age at retirement
60 years
60 years
Total retirement savings
R728 000
R 6.7 million
Tax-free lump sum that can be cashed out at retirement
R0
R480 000
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.
Look at your big financial picture with a qualified friend. It’s human nature to make financial decisions that seem good now but turn out to be regrettable in future. Seek financial advice from an accredited financial adviser to guide you through difficult financial times.
Glacier Financial Solutions (Pty) Ltd and
Sanlam Life Insurance Ltd are licensed financial services providers.
Your Next Read
We use cookies to give you the very best possible online experience. By continuing, you confirm that you’re on board with our privacy policy.
Got it
What Glacier Insights is…and isn’t
Glacier Insights provides investment professionals and financial intermediaries with information on the markets in general, Glacier products, and the services we offer. This website is not primarily for private individuals, but we are pretty sure that everyone interested in investing would find the content useful. If you are a private individual, please seek financial advice from a registered financial intermediary before you invest. A trained financial intermediary will help you determine which of our products are most appropriate for your needs. Glacier Insights is not designed to replace the job and expertise of a professional financial intermediary.
Content use and ownership
We love that you want to browse Glacier Insights, and please let us know if there is any more information that you would like us to provide. Also know that the intellectual property rights in the content are protected by local and international laws and agreements. So, our intellectual property may not be used in any way without our consent or the consent of any business that licensed us to use its intellectual property. This includes reproducing, changing, publishing, displaying, distributing, licensing or creating by-products of the content on this site, unless you receive our permission in writing. The website with all its content is owned by or licensed to Glacier by Sanlam, and includes text, graphics, icons, hyperlinks, private information and designs.
I have read the above and understand the purpose of the Glacier Insights website.