Do not take monies that are meant for your older self…

Do not take monies that are meant for your older self…

-Letlhogonolo Lesiba (Director, Cornerstone Employee Benefits)

It’s a sad reality that too many individuals still fall into the trap of cashing out their pension funds early and sometimes losing hundreds of thousands in the process – not to mention the compound interest that they could have earned if they preserved their funds. We believe in the long-term survival of your hard-earned savings, and that is why Cornerstone Employee Benefits will always do our best to give you advice that will ensure the best outcome for you and your retirement funds. Let’s look at a couple of reasons you should never cash out your pension fund before retirement.

Beware of the temptation

If you have been working with one company for a long time, chances are that you have a hefty fund credit built up. If, for whatever reason, you decide to leave the company, you will have the opportunity to either cash out your benefit or preserve it. For most of us, the temptation of a few of hundred thousand in our account is immensely powerful, but it is imperative that you refrain from giving in to it. As much as that money can change your life now, it will have a much bigger positive impact when you retire with it. Remember, it took you years of work to save that much and if you use it all now, you’ll never be able to make up for lost time and you’ll most likely end up with too little to retire. Think of your future, the future of your loved ones and rather opt to preserve your funds for those golden years.

The tax implications can be massive

One of the biggest downsides to cashing out your pension fund early, is that you’ll lose a massive part of your hard-earned savings to tax and penalties. Depending on the amount you choose to cash out, you can pay up to 36% of the total cash out plus lump sum tax payments. For example, if you have R700 000.00 in your pension fund and choose to cash all of it out, you will pay R114 300.00 plus 27% of the balance, a further R10,799.73. This means you will end up with only R574,900.27 – a difference of R125,099.73 from the original amount. Below is an updated table of the tax implications for each bracket:

Taxable income from lump sum benefits Rate of tax
0 – R25 000.00 No tax payable
R25 001.00 – R660 000.00 R0 plus 18% of taxable income exceeding R25 000.00
R660 001.00 – R990 000.00 R114 300.00 plus 27% of taxable income exceeding R660 000.00
Exceeding R990 000.00 R203 400.00 plus 36% of taxable income exceeding R990 000.00

Source: www.wellspent.co.za, https://bit.ly/2xhqXGR

You’ll lose out on future compound interest

The power of compound interest has been proven time and again. In short, compound interest means that when you earn interest on your capital, you’ll continue to earn interest on that interest. This creates a type of snowball effect, increasing the rate at which your investment grows. To help illustrate the long-term possibilities, you can find an easy to use compound interest calculator here . If you cash out your withdrawal benefit early, you’ll lose out of any future compound interest, “costing” you hundreds of thousands of Rands in the long run and halting your entire retirement fund’s growth.

Contributing to a retirement fund is a great way to build wealth for the future, but it’s vital that you manage your benefit properly to ensure that it keeps growing and evolving to your needs. Cornerstone Employee Benefits have dedicated years to perfecting art of management and structuring of retirement funds and  group risk policies. Contact us today if you have any questions about your retirement savings and remember to follow us on Facebook and LinkedIn for more useful and interesting content.  

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