Two weeks ago, we published an article on how you should spend your bonus. Another spending mistake most people make also include using their provident fund. Saving for your retirement is crucial to your future financial well-being. A provident fund is one of many ways that encourage employees to save for their golden years – using this fund incorrectly will see you living gold plated years rather than golden years. This article, seemingly similar to the spending your bonus article, will focus on preserving your provident fund.
A provident fund is a retirement fund that encourages the workforce to save money on a monthly basis. The employee, and in most cases the employer, contributes an amount on a monthly basis that is allocated to this fund. The employee is entitled to a pay-out upon retirement, resignation or dismissal. A pay-out like this can seem very appealing – especially if you are drowning in debt.
When you move to another company, you will have the option of either having your provident fund being carried over to your new employer or you can request that the provident fund be paid into your personal bank account. Those in desperate need for a quick cash fix might be tempted to grab at this opportunity. This isn’t an opportunity but rather a wolf in sheep’s clothing. Your provident fund is there to take care of you and your financial needs when you retire one day. If you resign or if you are dismissed, you may also transfer your provident fund to a preservation provident fund. A preservation provident fund is designed specifically to keep your nest egg safe – whether that is safe from you or others. The previous article also discussed resisting the urge to splurge. When it comes to preserving your provident fund, all urges should be nipped in the bud immediately. This is your retirement money – you don’t want to go spending it on something that unnecessary.
The South African government has made an activate attempt in encouraging South Africans to keep their provident funds in place. Amended legislation now states that only one third of provident fund contributions accumulated after March 2015 will qualify for a lump sum withdrawal. The legislation also forces South Africans to reinvest the remaining funds to provide a monthly pension pay out.
The ugly truth is that most provident funds aren’t even sufficient for a comfortable retirement. Your monthly contribution, along with your employer’s contribution, just isn’t enough to put you ahead. According to the 2015 Sanlam Benchmark Survey, only 37% of financially comfortable retirees have a retirement annuity on top of their company pension fund. The survey is a comprehensive annual review of South Africa’s retirement industry. The survey also found that 63% of those who had withdrawn from their retirement funds when changing jobs said that debt was the main reason for the withdrawal.
If you decide to take a provident fund pay-out or make a withdrawal from this fund, Benjamin Franklin’s words must not be forgotten – In this world nothing can be said to be certain, except death and taxes. Taking a pay-out or making a withdrawal also has tax implications. Only the first R 25 000 of your withdrawal or pay-out will be tax free. Any amount above R 25 000 will be taxed at a rate of 18% – not so lucrative any more, isn’t it? Withdrawal with the intention of spending should be avoided at all costs – even if the going gets tough.
According to recent statistics, only about 6% of South Africans can maintain the living standards they’ve come accustomed to when retiring. This extremely low rate can be attributed to most South Africans starting too late with their retirement savings as well as the high level of indebtedness most South Africans seems to be facing these days. If you want to retire comfortably, you don’t want to dip into your provident fund. If you are in the financial position to save extra money on top of your monthly provident fund contribution this can see your retirement life looking up. Products such as retirement annuities are a great way to grow your retirement portfolio. Most retirement annuities also allow you to select a monthly instalment you are comfortable with – this can be a great way to start saving, especially when you are still young and not raking in that CEO salary as yet.