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South Africans on average change jobs about five to seven times during their working lives. When changing jobs, 80% of them take their retirement benefits in cash, and only 12% transfer to another retirement fund*. Thandi Ngwane discusses why you should consider the long-term implications very carefully before you ‘take the money and run’.
Over the long term, taking a payout and spending it may cause more harm to your accumulated retirement savings than you think. You may believe you will have plenty of time to make up for the years of saving; in fact, not preserving costs you more years than you may realise. Not only will you have to start again, you will also miss out on the full power of compounding. Often referred to as the ‘eighth wonder of the world’, compounding means you earn returns today on the returns you earned yesterday, over and above the amounts of money you contribute.
If, for example, you decide to take a 100% cash payout at the age of 35 and spend it on a holiday or a few months of ill-discipline, you will end up with 40% less to live on when you retire. Put differently, if you need a monthly pension when you retire that is 70% of your final salary (increasing with inflation), your savings will run out 12 years earlier than if you had not taken the payout.
The government would prefer not to have to support you on a state old age grant, so the tax rules strongly encourage you to preserve your retirement savings. A cash payout now will reduce the tax-free benefits that will be available to you when you retire, so that the net effect is that your withdrawal is fully taxed. If you are taking the money out to invest, for example in a house deposit or even a unit trust investment, all the gains and income that you earn on the money will be taxed. This can make a big difference to the end result.
What are your options?
Depending on your circumstances, the best thing may be to transfer your savings into a preservation fund or a retirement annuity fund (RA). A preservation fund is specifically designed to invest your pension or provident fund savings, and as long as you have not already made a withdrawal, it allows you a once off chance to access your funds in future. An RA allows you to invest your current retirement fund savings and to continue to save. Modern (but not all) RAs allow you to start and stop contributions at any time without penalties, and a portion of your contributions will be tax-free while you are saving.
There are a number of factors to consider when selecting investment products. It might be helpful to get assistance from an independent financial adviser.