Podcast: Pension fund withdrawals

In Latest, The Fat Wallet by Kristia van Heerden

Under normal circumstances we would strongly caution against withdrawing from your pension fund. The reason is quite simple: the tax will make your eyes water. One decision can slash your hard-earned net worth by hundreds of thousands of rands. That’s not even factoring for opportunity cost.

However, since we’re currently living through the apocalypse, we might have to soften our stance on this. Some members of the financial services industry are lobbying for access to pension funds during this crisis. If you’re no longer able to earn an income, you might have to make a smart decision about this. 

In this week’s episode, we give you a sense of the different factors you have to consider before withdrawing from your pension fund. Naturally, we start with tax. We also consider the opportunity cost of the withdrawal, as well as the opportunity cost of taking on debt instead of withdrawing. 

We also spend some time making sense of the benefits of share incentive schemes.

At the beginning of the episode we mention emergency loans. These are the conditions you have to meet to qualify, and these are credit providers registered with the National Credit Regulator.


The bleeped show is below:


Clara

I am currently in my notice month. I’ve worked in local government for 13 years. I’m quite in a spin as to whether I should cash out my pension before 55, leave it or move to a provident fund. 

After long deliberation and getting some financial advice, I have decided to take the plunge and withdraw the cash, pay the tax, cut my losses and move on.  

Firstly I wanted to ensure that my pension will not be used to fund our government-owned companies, the possibility of junk status, the weakening rand after junk status and the management /administration fees that will be due to my portfolio manager for my provident fund if I choose to go that route. 

I wanted to “do the right thing” – to give my 30days notice as required by employment act, but this honorable decision has bitten me in the back and I have lost R200,000 in my pension fund in the last 30 days. 

I don’t want to make hasty decisions in ‘’panic mode’’ and withdraw as quickly as possible. The withdrawal will only happen in 2 -3 weeks, so I’ll lose much more, pay taxes on the little I have left after our market dropped. 

At this stage I am thinking of not withdrawing the funds, moving it to a provident fund, letting it recover as much as it can for a year or so, monitor the Rand/CAD$ exchange rate and take it from there.

But I’m afraid all the current negative elements such as junk status etc will have a much more negative impact. 

If I pay my pension fund into a provident fund it will still be affected by the markets, but maybe it will recover a bit before withdrawing the funds.

I don’t need the funds and thought to put it in a pension fund in Canada.

Although I am aware that all markets are affected, growth will probably not be better in Canada.


Win of the week: Kerry

Also Serena

You can do a transfer of the units held in your Allan Gray fund to an Allan Gray fund held on the  Sygnia platform. Sygnia offers a number of Allan Gray Funds on their alchemy platform. 

I did a section 14 transfer in September 2019 of the units held in my Allan Gray Balanced fund. Allan Gray need to convert it from a Class A to a Class C first before transfer. 

I did this for two reasons . I held this balanced fund in Allan Gray for over 15 years and did not want to lock in lack of performance of the last five years. I was also concerned about the volatility of the market during the time of the transfer process.

Over the following 7 months, I’ve switched out of the Allan Gray Balanced fund on the Sygnia platform when the price was appropriate. I switched into a combination of ETFs and the Skeleton 70 fund, according to my Long term Asset allocation strategy. Now everything has gone to hell in a basket, but at least I am in the passive ETFs and a fund I want to be in for the next at least 10 years at a fraction of the cost .

With regard to interest earned on cash kept in overseas brokerage accounts: I have a Degiro brokerage account and they don’t hold the cash themselves. Euros are held in a Morgan Stanley money market fund and the interest rate is -0.54%. 


Gary 

I’m in my early 40s. Until two years ago I was a financial newbie. I made all the classic big mistakes. High fees, head in the ground investing.

Between your podcast and Sam Beckbessinger’s book I’m busy with a big turn-around. I moved everything to broad low fee ETFs, maxing RA and TFSA, I am aiming for a 50% save/investing rate.

My question is on a potential TFSA hack : Putting the full R500K lifetime limit into your TFSA in one go, and accepting the 40% tax hit from SARS.

I have a medical condition that will only allow me to work for another 10 years. I was thinking this would be a great way to max out my TFSA and give it the longest amount of time to grow. 


Jon

From 1966 for 25 years, the SP500 was ultimately flat. 

From 1954 for 28 years, the SP500 was also flat.

From 1969 for just over 10 years, the SP500 lost almost 2rds of its value.

From 1929, over about 20 years, the SP500 lost about 2/3rds of its value.

These are long enough periods that it brings into question how risky a long term equity investment actually is.

I am diversified across regions, but it would be really interesting to hear you guys really engage with this on the pod. The black and white rules about average gains over long periods aren’t really bulletproof.


The Fat Wallet Show with Kristia van HeerdenThe Fat Wallet Show is a no-nonsense personal finance and investment podcast hosted by Kristia van Heerden and Simon Brown. Every week we answer questions by a growing audience of finance enthusiasts. Submit your pressing money and investment questions to ask@justonelap.com.

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