Accessing your pension fund early is like stealing from your future

Unlike in many other countries, members of pension funds in South Africa can access pension benefits before retirement.

Unfortunately, many choose to do so without fully understanding the effects these early withdrawals have, according to John Manyike, head of financial education at Old Mutual.

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"Cashing out your pension fund when you change jobs or resigning to access your pension fund may seem like a quick cash-flow fix, but in actual fact, you are crippling yourself," advises Manyike. Not only is the amount of money available at retirement reduced in this way, but there are also tax consequences.

Your aim should be to retain at least 70% of your last salary to maintain the same standard of living in retirement.

Risky manoeuvres 

"Risky financial manoeuvres of this nature tend to do more harm than good, as cashing in your pension borrows from your future and sabotages your financial wellness in retirement," he adds.

The harsh reality is that only about 6% of South Africans can maintain their standards of living in retirement. To compound the problem, due to high costs of living and rising debt, pension fund members are increasingly looking to access their retirement funds as "a solution".

• READ: So you want to retire early, but can you afford it?

"Working during our earning years may provide a decent lifestyle, but often will not secure a decent retirement. This is generally due to a lack of discipline and proper financial planning," says Manyike.

Debt traps

If you are tempted to resign to access your retirement fund and use the cash pay out to help fund your living costs or pay off your debts, think again.

"You have to consider the reason you are in debt, usually it is an unhealthy relationship with money and a lifestyle you can't support," says Manyike.

A budget will ensure you do not live beyond your means and will ultimately keep you from stealing from your future when you are too old to earn an income.

"Resist the pressure to have the same material things as the people around you and even the people on television. You may be able to use credit cards and loans to fake wealth for a short period of time, but you’ll pay for it later, and you’ll end up paying more," says Manyike.