Cash out pension fund when changing jobs to buy a house?

[Sly21C]

Is it a good idea to cash out your pension fund and then use that money for something very useful such as paying it towards a home loan?

I am currently renting and am strongly considering buying an apartment soon. I am also considering looking for another job. Normally when people change jobs they have the option of cashing out their pension. If I cash it out and pay it towards a house then surely it will be a good idea? Let's say I cash it out, pay all of it towards a house which will amount to paying 30% of the value of the house.

 

[DJ...]

No, your pension will benefit from compound interest which you certainly will not realise in a fixed asset like a property. You'll also be taxed on your withdrawal.

IMO a pension should not be touched, unless under times of absolute necessity...

Here is something to bear in mind when considering this - http://vanrooyenraath.co.za/financi...iability-early-withdrawal-retirement-benefits

 

[HavocXphere]

You generally get penalized when cashing out.

 

[Freaksta]

Definitly no, then ur savings for retirement start from zero again. Compounding starts from the beginning.

 

[DJ...]

The interest on a bond is minimal and can be a decent source of debt if necessary. You could perhaps lower your pension fund contributions if you absolutely had to, and pay off the bond quicker...

 

[Sly21C]

No, your pension will benefit from compound interest which you certainly will not realise in a fixed asset like a property. You'll also be taxed on your withdrawal.

IMO a pension should not be touched, unless under times of absolute necessity...

Here is something to bear in mind when considering this - http://vanrooyenraath.co.za/financi...iability-early-withdrawal-retirement-benefits

Good website. Generally pension money shouldn't be touched, but letting your own house which you bought decades ago can be a great source of income once you've retired?

Definitly no, then ur savings for retirement start from zero again. Compounding starts from the beginning.

True! But the 2008 recession resulted in a few people's pensions losing value. So the pension amount is not guaranteed? i.e. you could get less that expected?

 

[supersunbird]

Good website. Generally pension money shouldn't be touched, but letting your own house which you bought decades ago can be a great source of income once you've retired?

True! But the 2008 recession resulted in a few people's pensions losing value. So the pension amount is not guaranteed? i.e. you could get less that expected?

Lost value. Not made it disappear, it would have grown back nicely by now, very nicely if contributions continued. And what you loose in tax is just plain bad.

Retirement savings is for retirement. Get you home savings in order if you must, but leave retirement savings for its purpose.

 

[AlmightyBender]

It is never a good idea to withdraw your pension savings except in extreme emergencies. Never.

People always forget to take into account the compounded returns over time. Lets say you have R500000 in pension savings and still have 30 years till retirement. So you think that is worth R500000? Wrong! You must work out the present value of that sum after compounded returns over 30 years. All of a sudden we are talking about millions. It makes a HUGE difference to your final retirement savings. Literally millions of rands in todays values. This is the difference between destitution and financial independence.

The generally accepted rule of thumb for retirement is that you can get by on a pension equal to 75% of your final paycheck at retirement. In order to achieve this you need to save at least 15% of your gross income every year for 40 years without ever making any withdrawls. If you make withdrawls you will generally have to accept a much much lower income replacement ratio at retirement.

Ask any pensioner what they would change if they could go back in time and invariably they will tell you that they wish they saved more from an earlier age and didn't withdraw funds when they changed jobs.

In terms of renting your house in retirement... where exactly are you going to live if you are renting your house?

True! But the 2008 recession resulted in a few people's pensions losing value. So the pension amount is not guaranteed? i.e. you could get less that expected?

This event was nothing special in the boom/bust cycle of markets. Adversely affects those who had to retire in 2008/2009 but for everyone with a sound retirement strategy market cycles will have little to no effect in the long term. In any case the very simple solution for those people would have been to delay retirement by 2 years.

 

[HavocXphere]

People always forget to take into account the compounded returns over time. Lets say you have R500000 in pension savings and still have 30 years till retirement. So you think that is worth R500000? Wrong! You must work out the present value of that sum after compounded returns over 30 years. All of a sudden we are talking about millions. It makes a HUGE difference to your final retirement savings. Literally millions of rands in todays values. This is the difference between destitution and financial independence.

I don't think I'm following tbh - and finance is kinda home turf for me. Care to elaborate with calculations?

 

[ToxicBunny]

Yeah, a bit of elaboration would be nice....

 

[supersunbird]

What dont you guys understand?

AlmightyBender is saying that in you allow that R500 000 in pension fund money to grow and compound (in a diversified portfolio of course, heavy in equity since its long term) over 30 years it will be millions in todays money value (meaning when you take out inflation).

 

[Cius]

Never touch pension money. Just leave it. Drawing out that 500K today will cost you millions down the road.

 

[Ancalagon]

Oh right, I get it. Lets say that inflation is really bad, and your R500k becomes R500 billion.

However, that R500 billion, in 2043 Rands, could be worth say R4 million 2013 Rands, as a silly example.

 

[AlmightyBender]

Hehe sorry guys it was a bit late and I was in bed

So in 30 years time with a 12% return that R500000 will be R14,979,961. Now if we take the present value of that figure at a discount rate of 6% to represent inflation we come to a figure of R2,487,301. And that is the figure that you need to realize you are withdrawing.

If you withdraw it and put it into a house you are purchasing R500,000 of house with something that is actually worth R2,487,301 to you. If that money goes into your house you forefit all future returns which must be considered.

PV=R14979961 * (1 / (1 + (0.06 / 12) )^360) = R2487301

Apologies if my calculation is off, but the principle still applies.

 

[Ancalagon]

That applies to almost everything though. I mean, I can buy a chocolate for R10 today, or invest that money, and in 30 years time that R10 will be R74. So, it doesnt apply only to pensions, since every bit of money that you invest, will be invested with compound interest, and every bit of debt that you have, will have compound interest charged on it. What you should be advocating is greater fiscal discipline.

I mean, so what if you invest 15% per year, if you spend all of your money on cars and are still renting when you retire? Whereas, if I didnt have a pension at all, but owned 4 properties, that is not too bad, since the properties can provide a rental income to support me.

Yes, investing in a pension has tax benefits too, I know. I'm just saying, the compound interest effect applies to a lot more than just pensions.

 

[Other Pineapple Smurf]

Is it a good idea to cash out your pension fund and then use that money for something very useful such as paying it towards a home loan?

I am currently renting and am strongly considering buying an apartment soon. I am also considering looking for another job. Normally when people change jobs they have the option of cashing out their pension. If I cash it out and pay it towards a house then surely it will be a good idea? Let's say I cash it out, pay all of it towards a house which will amount to paying 30% of the value of the house.

You won't get a bond to start off with - banks are very strict about how long you've been employed for at the moment. They want to make sure they will get their money.

I would say it where a different situation if your a portion of your pension could buy you an investment property where you could rent out for a premium and you ploughed that money back into your pension but that is not your situation.

But as a first time home buyer that has rented till last week, I understand the desire to buy and consider a smaller, cheaper property first where you might get a 104% bond.

 

[Sly21C]

To be honest I don't like the concept of working a lifetime and then retiring. It's as if we work just so we can retire. I also don't trust pension funds these days because of what happened to Zimbabweans, whose pensions became worthless after the year 2000's Mugabe land grab which resulted in hyperinflation. People's pensions were also reduced substantially after the 2008 financial crises. I'd rather use my pension to start a business rather than living it there. I'm learning towards using my pension for a house.

 

[supersunbird]

To be honest I don't like the concept of working a lifetime and then retiring. It's as if we work just so we can retire. I also don't trust pension funds these days because of what happened to Zimbabweans, whose pensions became worthless after the year 2000's Mugabe land grab which resulted in hyperinflation. People's pensions were also reduced substantially after the 2008 financial crises. I'd rather use my pension to start a business rather than living it there. I'm learning towards using my pension for a house.

1. See the corrolation? You'd be really screwed if we do become a Zim2.

2. And if the people left thier money where it was, they will be smilling all the way to the bank, since is has rebounded to above pre'08 levels and if one had been contribution at that time you woud dhave got a lot of assets/shares very cheap and now they are worth more.

AGAIN my advise is, preserve it. Put it into a flexible unit trust Retirement Annuity or a preservation fund (this allows one withdrawal if REALLY required). You will also pay lots of tax if you cash it in. And it has nothing to do with working to retire because then you are doing it wrong, its to go towards financial freedom so you can do whatever you want and not have to work for a salary (which is why one had to have retiement saving that becomes available at 55 and discretionary saving for along the way.