Preserve or settle debts?

Meshack asks: I am resigning from my job as an educator after 13 years. My gratuity is around R420 000. I owe R180 000 on my house and R120 000 on my car.

Should I cash in the money and settle my debts or preserve the money? I may not have an income for some time to come.

Maya replies: This is a difficult situation because your pension is for your retirement but you say you may not have an income.

If you cash your retirement funds in now you will not have enough money to retire on. I see from your age band that you are already over 36-years old, so you do not have a lot of time to catch up on your retirement savings.

In addition you will pay tax if you withdraw about R72 000. Not only that, on retirement you would lose your tax-free withdrawal benefit of R300 000.

If you preserved the pension, after 20 years it would be worth about R3-million if the investment grew by 10% a year. So it would make sense not to cash it in.

However you say that you will not be receiving an income for some time and you do not want to be in a position where you lose your home and car.

Try make a plan where you can earn an income (even renting out a room in your home) to cover your expenses. Consider your pension your last, most desperate resort.

If in a couple of months’ time you really are desperate you can make a one-off withdrawal from a preservation fund — all the tax consequences will still apply.

It is always important to keep your retirement savings separate from your living expenses. It is a way of your younger self looking after your older self.

Read more news, blogs, tips and Q&As in our Smart Money section. Post questions on the site for independent and researched information.

Maya Fisher French
Guest Author
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