After 45 years of service in government, Thabo is looking forward to retirement. He has many plans to do things he could never afford, such as spoil his children, take his wife on a holiday, and perhaps, get the Mercedes he always wanted.
“I want to do all these things, and to do it now,” says Thabo.
“After working for more than four decades, surely I have earned the right to this indulgence?” asks Thabo. He could have left government many years ago, taken a lump sum and started a business.
But after meeting a former colleague one day at a supermarket, this scared him off any dreams he had to cash in. “Lesiba was unhappy and living with his children, having resigned and cashed in his pension over a decade ago,” says Thabo.
“He invested in a business around the time of the 2008 credit crunch; it was disaster, the wrong time. Sadly, he lost everything. His wife Doris passed away soon after. It’s no fun for an independent person living with a son who has his own family,” explains Thabo.
Since he was employed for less than 10 years, Lesiba received a once-off lump sum called a gratuity. This lump sum was equal to the actuarial interest (the value of your benefits in the Fund, based on a formula).
That’s why Thabo decided that resigning before retirement would be a major risk. Not only would he face the prospect of using money that had been saved over the years, he would also lose the benefits payable upon retirement. For example, if you resign (instead of retiring with more than 10 years of service) you will receive a greater lump sum, but you will lose the right to a monthly pension, as well as, in certain instances, your right to a post-retirement medical subsidy from the State.
“I didn’t want to risk the security, face the prospect of not being able to cope after retirement, or leave my family without something to help lift them out of a life of hardship,” says Thabo.
He knows that retiring after more than 10 years will ensure a once-off lump sum called a gratuity that can be invested, and a monthly pension, known as an annuity.
It seems the wiser choice, because choosing early retirement means reduced benefits. Many are attracted by the lure of a lump sum of money without considering the impact on retirement with a lesser amount, the ability to maintain one’s standard of living and whether one’s surviving spouse will be saddled with debts in the event the main member dies.
Thabo says he always knew that there was a resignation benefit available on resigning, being dismissed due to misconduct or illness occasioned by your own doing. The resignation benefit is a lump sum calculated according to a fixed formula, using your final salary and years of service.
“Of course, many a time, one is tempted to take this option and be debt free,” says Thabo.
But he resisted the temptation. With retirement finally around the corner, however, it is decision time again for Thabo. Should he cash in all his hard-earned savings and pursue his dreams? Or should he take a monthly annuity that will provide a decent income for as long as he lives?
By not leaving the fund earlier, Thabo will derive greater benefits because of staying longer and will now receive these benefits in two ways:
- A once-off lump sum called a gratuity, which he can invest; and
- A monthly pension called an annuity.
Furthermore, Thabo will have peace of mind knowing that if he passes, his wife will get a pension. But Thabo will have to decide wisely how he decides to spend the gratuity.
For starters, Thabo should be planning for retirement with the advice of a financial planner. This advice will centre around ensuring the longevity of the proceeds one is due on retirement.
Taking out the entire sum of money will have tax implications. However, the first R500 000 is tax-free – this could be withdrawn to put in a savings or short-term call account to gain interest and use as required. But the bulk of the proceeds should provide a monthly pension.
“I always remember Lesiba feeling trapped without a decent income, and feeling as if he were a burden to his family,” remembers Thabo.
While one may be tempted to think that one can make a luxury purchase, spoil the children and go on holiday, one must resist the temptation to spend by focusing on the long-term future, which after retirement depends solely on one’s pension.
“Apart from Lesiba, there have been many a hard-luck story of people cashing in their pension before retirement, hoping to make a quick buck by investing in something, or just enjoying themselves,” says Thabo.
“The reality is that when the money dries up, in many cases so does the relationship one had with one’s family,” he says.
Resigning and taking the money is final — and once the money is gone, you cannot recoup what was meant for a pension; thus begins a life of struggle.
Normal retirement age for government employees in South Africa is 60 or 65, according to the provisions of the Public Service Act. But when you may retire varies according to the legislation that applies to your situation, and the conditions to which you agreed in your terms of employment. You can retire from age 60 without being penalised.
With his 65th birthday approaching, Thabo is clear: “I don’t want retirement to be a struggle, neither do I want to be a burden on my children.”
He plans to withdraw a small amount to settle debts, treat his wife to a holiday, put something small in unit trusts for his grand-children, and get involved in the community, volunteering at the local community centre.
“Retirement does not mean one stops working; it’s about putting back into the community,” he says.
- GEPF recommends that you consult a financial advisor at least five to 10 years before you want to retire, to ensure that your pension benefits will be enough to meet your needs. Upon retirement, you need to correctly complete some forms and get certain documents ready for your human resources department, as follows:
- Banking Details form (Z894)
- Retirement Choice form
- Medical Scheme Membership form (Z583): you must have been a main member of a medical aid for the last 12 months before retirement
- A certified copy of your bar-coded ID or passport, not older than six months.
For more details, visit https://www.gepf.gov.za/