Fin24

Pension pay-out vs debt

2011-11-08 07:29

A Fin24 reader asks:

I have a R55 000 loan and a R20 000 credit card. I am leaving my current company for a new job. But I am not sure if I should take out my pension fund pay-out to pay off the two bills or reinvest the pay-out.

Michelle Benatar of Benatar Consultants responds:

I would advise you to transfer your pension fund into a preservation plan as no tax is payable on your existing pension by doing so. Moreover, you are preserving and potentially growing your retirement benefits. As for your existing debts, I would reduce them on a monthly basis by exercising financial discipline and avoiding unnecessary expenses.

Jackie Robinson, MD of The Art of Wealth, responds:

I would also strongly advise you not to withdraw from your pension fund but transfer it into a preservation plan and then withdraw a portion of your fund to cover your existing debt.

(Preservation funds are a way of preserving savings until retirement. Transferring your money into a preservation fund offers you the flexibility of making a withdrawal from the preservation fund before retirement.)

Debbi Netto-Jonker, co-owner of NettoInvest, adds:

Legislation has changed, which removes the requirement of only using the preservation funds for which your former employer is registered as a participating employer. This provides flexibility to transfer the retirement fund investment value into a preservation fund of the employee's choice. But this still needs to be communicated to your ex-employer.

Making no decision as to your retirement savings may cost you dearly. If retirement fund money is not transferred into a preservation fund or a retirement annuity within six months of the date of exit, the Receiver of Revenue will knock off its dues in income tax and you will be paid the balance in cash.

Getting this reversed can be a painful and lengthy exercise.

 - Fin24

Comments
  • 100002617173228 - 2011-11-08 12:01

    It amazes me that all 3 responses adavise that the funds should be moved into a preservation plan which will attract fees and commissions. NOT 1 MENTIONED THAT THE CLIENT SHOULD LOOK TO TRANSFER HIS/HER PENSION TO THEIR NEW EMPLOYER'S FUND IF AT ALL POSSIBLE. THIS WILL COST THE CLIENT ZERO, SO 100% OF THE CURRENT VALUE WILL BE TRANSFERRED. MAKES YOU THINK DOESN'T IT!!! by paul johnston.

      Sharky - 2011-11-09 11:09

      A preservation fund give the member more control over his/her investments and more options - (e.g. one withdrawal inthe case of dire emergency.) Transfer to the new employers fund would be the best option in the case of a final salary (defined benefit) scheme, but these, sadly, are extremely rare.

      Sharky - 2011-11-09 11:09

      A preservation fund give the member more control over his/her investments and more options - (e.g. one withdrawal inthe case of dire emergency.) Transfer to the new employers fund would be the best option in the case of a final salary (defined benefit) scheme, but these, sadly, are extremely rare.

      Sharky - 2011-11-09 11:09

      A preservation fund give the member more control over his/her investments and more options - (e.g. one withdrawal inthe case of dire emergency.) Transfer to the new employers fund would be the best option in the case of a final salary (defined benefit) scheme, but these, sadly, are extremely rare.

  • 6cents_tweet - 2011-11-08 13:21

    It is a weakness of the financial planning industry that their judgment is clouded by selling products. If we look at the above situation the 2 debts probably attract interest of around 25% - that is an after tax yield that is guaranteed which no fund can offer. Therefore the calculations cannot be argued that at the very least the R22,500 tax free portion should be used to settle the debts but I may go as far to say take more to settle such expensive debt especially if it attracts interest of more than 30% per annum. Thereafter work hard to replace these funds, cut down your wants and live within your means to ensure you never make use of unsecured credit again. This will mean that the future savings on interest paid can go toward rebuilding your retirement fund

  • Theo - 2011-11-08 14:17

    Dear Debbi, GN35 tax stopped 1 March 2009, also the 6 months period has been extended to 24 months within which you need to exercise an option concerning your retirement benefits.You are 31 months behind on changes in the industry and you come and give advise on this website.This is really a bad piece of work from all the advisers.

  • John van der Merwe - 2011-11-09 09:05

    also nobody seems aware of the beneficial tax rates availible on your withdrawl if you are leaving due to a forced retrenchment. You are entitled to take a portion of your money and pay tax as per the retirement tax tables, not the once off withdrawl tax rates. on a 600k withdrawl you would save around 100k in tax. Always risky to give one-size-fits-all advice.

      Sharky - 2011-11-09 10:53

      @John bvan der Merwe - Early withdrawal from retirement funds results in severe consequences when one retires - the retirement allowances are significantly reduced and not in the way one would expect. Contact a professional. Also there is a psycholgical aspect - many people end up with insufficient retirement unds due to early withdrawal (for tax and debt reasons) and then not investing correctly.

      Sharky - 2011-11-09 10:53

      @John bvan der Merwe - Early withdrawal from retirement funds results in severe consequences when one retires - the retirement allowances are significantly reduced and not in the way one would expect. Contact a professional. Also there is a psycholgical aspect - many people end up with insufficient retirement unds due to early withdrawal (for tax and debt reasons) and then not investing correctly.

      Sharky - 2011-11-09 10:53

      @John bvan der Merwe - Early withdrawal from retirement funds results in severe consequences when one retires - the retirement allowances are significantly reduced and not in the way one would expect. Contact a professional. Also there is a psycholgical aspect - many people end up with insufficient retirement unds due to early withdrawal (for tax and debt reasons) and then not investing correctly.

      Jim - 2011-11-09 13:34

      Problem is that if you are retrenched and draw from your pension they will lump both the retrenchment package and the pension together and alow you first 315 000 tax free then the rest taxed as per table. I.E Pension is not treatedseperate.

      Jim - 2011-11-09 13:34

      Problem is that if you are retrenched and draw from your pension they will lump both the retrenchment package and the pension together and alow you first 315 000 tax free then the rest taxed as per table. I.E Pension is not treatedseperate.

      Jim - 2011-11-09 13:34

      Problem is that if you are retrenched and draw from your pension they will lump both the retrenchment package and the pension together and alow you first 315 000 tax free then the rest taxed as per table. I.E Pension is not treatedseperate.

  • Phillipk - 2011-11-09 18:03

    As a financial advisor, I - surprisingly, I suppose - have another answer: dependant on the amount of the pension payout, I may well consider cashing it in. You will only get the lifetime R22 500 tax-free amount and the balance will be taxed on a tiered basis as per the relevant withdrawal tax table and, additionally and very importantly, you will be losing the amount that you could be accessing tax-free at retirement i.e. if your fund is now R500k and you withdraw the lot and you subsequently commute a R1M retirement annuity when, say, you are 65, you will not get the R315k tax-free because you would have already accessed R500k from your pension fund, irrespective of the fact that you paid tax on just about all of it. HOWEVER, you can now pay off your debts totalling R75 000. What you now need to do is ensure that you effect an investment - tax-free or an RA - for the premium you were using to pay off your debts AND you must additionally invest the pension amount - less the tax and less the liabilities you have now settled - so that you have a tax-free investment growing for you and to be utilised at retirement. You need to run the numbers to see which yields the best after-tax income in your pocket at retirement, but that is a very easy exercise to do. Good luck! Just another way of looking at things.

      Riaan - 2011-11-17 09:51

      Sorry, against human nature

      Riaan - 2011-11-17 09:51

      Sorry, against human nature

      Riaan - 2011-11-17 09:51

      Sorry, against human nature

  • Gavin - 2011-11-17 07:30

    Paying off debt with retirement savings is just robbing Peter to pay Paul - bad advice Jackie - besides the negative tax implications of withdrawal as opposed to preservation. Another thing, having a professional financial planner set up the underlying assets in the preservation fund makes sense in terms of matching client to risk profile, term to retirement, retirement goals etc, etc. And the planner should surely be remunerated - after all who works for nothing? Paying peanuts could be a false economy in the long term. As it is far too many people are living for today and will be sukkeling when they stop working. All this stuff needs to be taught at schools - like the power of compound interest, the 8th wonder of the world according to Einstein. In fact all investment is, is discipline, time and compound interest

  • Anthony - 2011-11-17 09:33

    Preservation for now, for sure, but on Retirement a FedGroup Part Bond may at the time, depending on circumstances, risk profile, products and rates, be something to consider, for a portion of your investment.

  • MDSS - 2011-12-12 11:45

    I would like to ask the following question: [a]. By the end of January 2012 Exxaro Resources would like to pay us a five year money for the shares they once issued.Now I would like to know from you if the money is above R80000,00 what do you think I must do? I have a Home loan with Absa bank and some of the debts, what to do in this regard?

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