Covid-19 has done a lot of damage to our already battered economy and many people are struggling to make ends meet and to get out of debt. But before you cash out your retirement savings, think about the long-term consequences and consider other options.
Most employed South Africans contribute to a pension or provident fund through their employer. It can be difficult to see that deduction on your payslip every month, especially when the bills you have to pay are more than the money you bring home. However, that retirement saving is extremely valuable, and you will be very grateful for it when you retire one day.
When you change jobs, you have the option to cash out your pension fund and take the money, or to transfer it to your next employer or into an investment fund. Research shows that about 77% of South Africans choose to take their pension money and use it when they change jobs, instead of preserving it and keeping on saving. In fact, some people resign specifically to get to their pension cash when times are tough.
Their reasoning often is that if I can’t survive today, my pension will be of no use 10 or 20 years down the line. This is especially true in times like these when a global event has cost many people their jobs.
Let’s look at why you shouldn’t cash out your pension, and what other options you have to deal with debt.
The cost of using your pension money today
There are three costs linked to using your retirement savings before you reach retirement age:
But how do I survive now?
According to research, some 63% of people who cash out their pensions, use the money to get out of debt. The good news is that there are other ways to clear the debt. One of the best options is debt consolidation.
When you consolidate your debt, you take out one big loan to pay off several smaller loans, so that you are left with only one, more affordable repayment. In the process, you can settle your other debts early, which puts you in the position to negotiate settlement discounts with your credit providers. In exchange for getting their money early, most credit providers will be willing to give you a discount. As a result, the value of your consolidation loan will be less than the total of your previous debts, which means your single monthly repayment is usually less than what you used to pay before. You will also pay less interest on the lower, consolidated amount.
Debt consolidation is a good way to get out of debt trouble. The goal, however, should be to stay out of trouble. You can achieve this by: