Pieter M is 43 and earning R20 000 a month when he is suddenly retrenched.
Having contributed to the company's pension fund for 12 years, he has accumulated R947 000. After struggling to find a new job, he decides to withdraw all the money in his pension fund and use it to start his own business. He pays 34 percent tax on the lump sum, based on his salary at the time of retrenchment, leaving R625 632 of his original capital.
He uses the money to start a pub. Initially the business does well, but after four months it begins to falter. Not having much business experience, Pieter is not sure what to do but soldiers on hoping things will improve. A year later he is forced to close the pub. He only has R25 000 of the original R625 632 left and his creditors are keen to get their hands on it.
Pieter's situation is frighteningly familiar to many South Africans. Many people who have been retrenched and are unable to find another job consider starting their own business to support themselves.
But is it a good idea to gamble your pension money on a new business?
A pension fund is generally the cornerstone of your retirement income and should not be used as security for a business because new businesses are inherently risky. Pieter would have been wiser to transfer the money in his pension fund to a pension preservation or retirement annuity fund. And he would not have paid income tax had he transferred it directly into an approved fund. But best of all, it would have been safe from his creditors as money invested in an approved retirement fund is currently protected by law.
If Pieter needed capital to start a new business he could have taken a portion of the fund value in cash - subject to the rules of his pension fund - paid the income tax and then used it as security against a bank loan. He would then only have risked part of the money. He could have transferred the rest into a preservation or retirement fund.
Pieter's biggest problem now is that he may never be able to retire. At 44 he has only 16 years before normal retirement age. He will have to spend the rest of his life working, or significantly reduce his standard of living.