“People who job hop, work four to five years at a job, move out, get their little pension payout, take it out, pay the tax and buy a new car and new furniture, waste the money. Your time is very precious, you can’t buy your time back, so the need to preserve that money and it should be locked in for your retirement, is imperative,” Old Mutual senior financial planner Hylton Joffee told CNBC Africa on Monday.
“But a lot of people, when you’ve got access to money you usually spend the money and that’s a big problem, so we use the preservation fund to try and at least give them a locked in place to grow it.”
Because of the increasingly easy access to credit from banks, retail accounts and micro lenders, a number of South Africans are living beyond their means. According to Kobus Hanekom, head of strategy governance and compliance at Simeka Consultants and Actuaries, as a result of living beyond one’s means, 80 per cent of those that gain access to their pension fund end up using it to pay their debts.
“I think it’s a behavioural finance matter more than anything else. Apparently it’s hardwired into our brains that we are more inclined to look for a short term-type return rather than a long-term return. And so that is part of it. We live in a country with a 25 per cent unemployment ratio, and we have to factor that and take that into account,” Hanekom explained.
In the event of resigning or losing one’s job, the preservation or protector fund can be used to transfer one’s pension into a preservation fund, where there is no tax charge, as opposed to transferring the fund to a commercial bank account. The money can grow over a period of time if invested into a basket of the various funds available.
[DATA INL:Investec Bank], [DATA OML:Old Mutual Bank], [DATA CML:Coronation Fund Managers] and Allan Gray are some of the companies that offer the preservation fund option.
Depending on the amount of money collected over the years in a pension fund, one can enter the equities market and buy shares as an alternative to an entire spending of the funds.
“The average member in our portfolio earns about 10,000 rand a month, for the average member that is just too far a jump to make. It’s a very good opportunity to go into the market but when you do that, then you’ll probably be a person in the higher income group, then you’ll face the tax as you transfer across,” said Hanekom.
Money in a preservation fund is free of estate duty, executive fees, and tax charge. Once a pension fund is placed in a preservation fund, it is locked until the owner is of 55 years of age.
It does however have only one window period for withdrawal for emergencies before the client turns 55 years old.
“You put the client at ease by saying I’m not locking you in, you can get to it but let’s start off and be sensible and preserve your money. And that’s when the planning comes in, you show the advantages of saving within your means,” said Joffee.