In these current market conditions, if you have a job, hold on to it. Resigning from a job without a new one lined up, just to access the money saved in your retirement fund can have devastating consequences down the line. 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 with regard to cashing out your pension fund are in place to dissuade you from doing so, and with good reason.
You may be financially desperate, but Sherwin Govender, Business Development Manager at Glacier by Sanlam, provides a summary of why you need to stay in the job you have and step away from your retirement fund:
- Don’t jeopardise your financial future. Resigning from your job purely to access your retirement fund is risky. 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 the breadwinner.
- Don’t rob your retired self. Retirement savings are meant for when you retire. Spending them 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.
- Cashing out your retirement fund is taxing, literally. You can only cash out your retirement fund if you withdraw from the pension fund, i.e. when you resign. Resigning and retiring are two completely different scenarios.
a. If you retire, you can only cash out up to one third, and the balance must be used to purchase an annuity.
b. 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’s 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.
- Consider all the money you will be losing in compound interest. You are giving up a lot of the “magic” of compound interest, especially if you cash out 100% of your pension fund now.
- 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
Glacier Financial Solutions (Pty) Ltd and Sanlam Life Insurance Ltd are licensed financial services providers