Saving vs paying off debt

Q Candice Mitchell asks:

I recently resigned after 10 and a half years of service. I have a very good pension fund with my current employer. My new employer does not have a pension fund or any other type of fund. We have thought about taking a lump sum and putting it into our bond, but don’t know if that would be the right option. Would it be better to transfer it into another pension fund? We have two other retirement annuities. Is one option better than another?

A Denver Keswell of Metropolitan Odyssey replies:

This is a dilemma faced by many today. Unfortunately the answer is not straightforward. I am a strong believer in saving towards retirement. I will address some of the consequences of saving your resignation benefit versus taking the benefit in cash. Hopefully by the end you will be in a position to make an informed decision.

Option 1: Take the cash benefit

Should you exercise this option, R1 800 will be tax free and the remainder will be taxed at your average rate of tax. Assuming that your resignation benefit is R100 000 and your average rate of tax is 30%, R98 200 will be taxed at 30%. You will therefore be left with R70 540 after tax.

If paying tax on this option does not concern you and you are already sufficiently saving for retirement, you will be left with the option of what to do with the withdrawal/after-tax amount. The dilemma is whether to reinvest or whether to pay off debt, for example, your bond.

To make an educated decision you need to compare the interest rate of the bond/debt to the net rate of return on the investment. More often than not your interest rate on the bond/debt repayment is higher than your net rate of return from investments. Under these circumstances it would make more sense to pay off your debt. I suggest asking your financial planner to assist you to calculate these two options.

Option 2: Transfer your benefit into another retirement fund

You can transfer your entire resignation benefit to a retirement annuity (RA) tax free. Using the example above this would mean that the entire R100 000 can be transferred to an RA tax free. You can usually transfer a resignation benefit from a pension fund to a new employer’s pension fund or a preservation fund, tax free.

You have, however, indicated that your new employer does not have a pension fund. You should ask your financial planner as soon as possible whether you would meet the requirements of a preservation fund. This is a favourable option for someone who might need to access the benefit before retirement, because a preservation fund allows you one cash withdrawal prior to retirement.

You have indicated that you already have two RAs. In the absence of a needs analysis and/or the projected value of both funds, it is difficult to judge whether your savings in the RAs are sufficient. Your financial planner will give you an indication as to what you need to save towards retirement. Statistics indicate that only 6% to 8% of South Africans can retire independently.

Should you choose the RA or preservation fund option, you will receive tax concessions on retirement. As of October 2007 you will receive the first R300 000 of your cash lump sum (one-third of the fund) tax free. The remainder of your lump sum also will receive tax concessions. Another advantage of transferring your benefit to a retirement fund is that the investment in the fund is untaxed. By introducing tax concessions government is encouraging saving for retirement.

Topic of interest

QAzhar Osman asks:

How does the 55-day, interest-free period work? For example, if I purchase goods for R100 and pay off what I owe within 55 days of the date of purchase, will I still owe interest?

A Marije Pierson of Infochoice replies:

Generally the interest-free benefit works only if the card is paid in full every month on or before the payment due date. If the cardholder chooses to pay the minimum monthly payment, he or she will still pay the interest.

There are two ways banks operate:

  • FNB and Absa structure interest payments based on the monthly statement date. You get 55 days interest free from the date of statement. For example, if your statement date is the 10th and you make a purchase on the 15th, you will get 50 days interest free.
  • Standard Bank and Nedbank calculate interest-free days from the date of individual purchases.

Remember that banks offer different interest-free days — some offer 44, some 55, some 57 and so on.

Please send your questions to mayaf[email protected]

Ben Mahlangu is this month’s winner of the savings tips competition and wins a memory stick for his efforts. Ben has some tips on how to prevent the Christmas spending hangover.

Most of us get into the habit of exorbitant spending during the festive season, especially on food and other such stuff.

Shoprite Checkers sells R5 vouchers that you can purchase on a monthly basis whenever you like and in whatever quantity. So, for example, if you can commit to buying R200 worth of vouchers every month, come Christmas you have more than R2 000 to spend on groceries and the like and you don’t have to spend your 13th cheque on food. You will also be better prepared for the slow month of January.

It might not seem like a lot, but we spend so much money on entertainment and communication (for example, airtime) so start saving for the festive season today by investing in vouchers.

Please send your tips to [email protected]. Next month’s winner will receive a wireless mouse valued at R250.

Please would Naheen Toolsee, a previous winner, contact the M&G to claim his prize

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