Debt Management vs. Retirement Savings: Making Smart Financial Decisions

They're in a fortune position where they earn enough money that they can over-contribute to retirement funds . So just as a reminder for those of you that may not know , you're allowed to invest up to a maximum of 350,000 Rand a year in retirement funds and still get a tax break .

Any contributions over the 350,000 Rand becomes a bit of a complicated formula , but you don't really get a direct income tax break for the contribution . So from my perspective I'm not a big fan of over-contributing to retirement funds . I think getting the income tax break in the year that you are paying the tax makes a lot of sense .

So if you're contributing , if you're earning a lot of money and so you're paying income tax at 45% , then contributing money to a retirement fund means that a portion of that . Then contributing money to a retirement fund means that a portion of that pretty much 45% of your contribution is given back to you by SARS as a tax break .

So that's a really nice benefit for investing in a retirement fund and really important to remember that when you invest money in a retirement fund , the retirement fund itself pays no income tax .

It pays no dividends tax , it pays no capital gains tax , so all of the growth inside your retirement fund is tax-free and you're getting a tax break for contributing to the retirement fund . So there's a huge amount of benefits to making the contribution .

But I think to your question , anonymous , I think you should limit that to the maximum amount where you get a tax deduction . Don't over-contribute . Instead , you should definitely be contributing to your tax-free savings account .

As a reminder , you can do about 3,000 Rand a month or 36,000 Rand a year as a maximum contribution to tax-free savings account and certainly you should be doing that almost before you do the retirement fund contribution .

So if you are maxing your tax-free and you've maxed your retirement fund contribution , then the balance of the money you can add to a high growth , a general equity unit trust or an index tracking exchange traded fund . I don't mind either way , just make sure that it gives you the long-term capital growth that you're looking for .

So thank you very much for the question . I think it's a really nice one . Then we've got a question from Palesa , and Palesa is asking about understanding the impact of withdrawing money from a retirement fund in order to pay off debts .

And you know , the question is Palesa's asking is should I rather resign and start all over , in other words , resign to get the money from the retirement fund , or what should Palesa do ?

I think it's a real question that faces a lot of our people in our country , you know , and a lot of people will resign from a job so that they can cash in the money from their pension fund and then use that money to fund debts or cover an emergency expense or something like that , and for me , I think that is absolute wealth destruction .

I'm not saying , palesa , that you're being silly . I understand the reason why you're looking at your retirement fund , but I just think you need to understand that the implications are enormous .

So you're going to pay so much tax almost as a penalty a withdrawal penalty for taking the money from your retirement fund that if you've got 100,000 Rand in there , you might be losing 33,000 Rand of that just in tax . And if you have to quit your job to get that money , there is no guarantee that you get another job .

Unemployment in our country is so bad and it's so hard to get a job that I almost think you should do anything else . Try anything else before you start thinking about quitting your job to try and access your retirement funds .

And I understand that when you've got overdrafts or personal loans or credit card debt or something , that the debt burden is huge and that we need to talk about debt , that's true .

But I just want to kind of encourage you , as much as you possibly can , try not to quit your job to access your retirement money , because if you access the retirement money , you pay off your debt and you've lost your job and you can't get a new one , then you're just going to start building up debt again and the problem will just get bigger and bigger on

you and eventually you're going to be stuck in a really deep hole . So I think there are going to be doing some retirement reforms now where we will be able to access some of our new contributions , so it's new money that we put into retirement funds into the future . You'll hear the phrase two-part retirement system , and that's what they're talking about .

You'll have your long-term part and then a part that is also long-term but that can be accessed in an emergency and I think that will be a good idea for future money , but it won't help you with money you've already got in your retirement funds .

So I think you need to just stop and take a second place and look at the debts that you have , understand your expenses If necessary , sell some assets if you need to .

We don't know anything about your position , but if you're driving a bigger , expensive car and that's one of your big debts , then maybe you need to sell the car and buy a much cheaper yes , still a safe car , but a much cheaper , much smaller car . That could be an option .

Maybe get a side hustle on the weekends where you can do something for a bit of extra work . It doesn't matter what it is whether you have to kind of get a part-time gig selling stuff or being a waitering , it doesn't matter Just anything that you can do extra to kind of earn some money to pay down your debts .

But if you can retain your job at all costs , you know , and try and kind of work on your skills , you know , if the company can pay for you to do some extra skills and get more kind of ability to earn more money because of more skills , then that might help you .

But you know , I'm sorry , I just think you know , quitting your job to access your retirement funds a lot of people do it and they get themselves into such big financial difficulty after that .

You know they think they're solving one financial problem and you know that's a bit like , you know , sitting in the frying pan and then you jump out of the frying pan and you think everything's fine and you land in the big fire and you know , then you get cooked and I think you know , just I don't think that you should do that , unless , if you can .

Then we've got another question here which is asking if we can talk about living annuities , because there's certain platforms most of the big platforms in fact don't allow living annuities to invest 100% of the money in international investments .

There is kind of a cap on how much you can invest offshore in a living annuity and for most of the platforms it ends up being around 40% of the value of your living annuity .

And so you know people are a little bit upset now because they want the ability to take a bit more of their living annuity , which is their retirement funds , and send that money into international investments and reduce their South African exposure . So I think maybe a couple of comments . One there are platforms that still have more offshore capacity .

Unfortunately they're not platforms I really like . Most of them tend to be those that belong to insurance companies . They are companies that have a lot of cash on their balance sheets , have a lot of money market investments and I'm not convinced that their service or their fees are the best for individual investors .

So you know , the platforms that have hit a cap on their offshore capacity are generally those that you know are pure investment platforms .

You know they have a large allocation to kind of diversified portfolios , both in South Africa and globally , and they tend to sit on a little bit less in money markets and big cash accounts and that's why they've hit this cap . I think it's important to understand that the cap is not a permanent thing .

It's not like a law now which is kind of a new regulation that's been brought in . It's a longstanding kind of control of capital inside life assurance vehicles and living annuities and retirement funds in general are life assurance vehicles and living annuities and retirement funds in general are life assurance vehicles , and that cap will ease again into the future .

You know , when the RAND strengthens . When the RAND gets a bit stronger and the JSE starts to do a bit better and international markets , you know , don't run away from the JSE as much as they have in the past then you're going to find that that capacity will start to open up again and you might be able to send some more money offshore .

So I think you know , be careful of just chopping and changing your living annuity platform because of a cap on that offshore capacity . You know that's kind of going to be a temporary thing , but let's just talk about your offshore allocation . So inside a living annuity you can send 40% of your living annuity offshore already .

And then if you look at the balance of the money let's say it sits in a balanced fund it's important to look at that balanced fund and understand that a big chunk of that balanced fund is very rand hedged already . A lot of the stock exchange in South Africa is massively rand hedged already .

A lot of the stock exchange in South Africa is massively rand hedged . And what I mean is that a lot of our big businesses if you look at NASPARIS and Process and SAB or AB InBev now it's called Richemont the really big mining houses they sell most of their product in dollars or pounds or euros or whatever , but they don't sell it in rands .

They don't in fact sell a lot to the South African economy . So it means that between your 40% offshore capacity already in the living in Yosi and the rand hedge of the JSE , you've got a real kind of bias already to offshore investments in your living in Yosi .

So the likelihood is that if you've got a high equity balanced portfolio in other words you've got sort of 65% to 75% in shares , with the remainder in cash , bonds and property and a bit of cash , and then 40% of your portfolio is offshore the likelihood is that you probably have got a rand hedging of about 60% in your living annuity already and I think that's

sufficient . I wouldn't necessarily want to increase that much more . So even if the cap increases again , you know you might want to push your offshore allocation to 50% , but maybe don't go too much .

It's important to remember that , although the RAND has weakened over the last sort of decade almost quite severely , there are times when the international markets go sideways or they go down , their currencies weaken and the JSE performs well and the RAND strengthens .

And if your whole living annuity is offshore and the RAND starts to strengthen , that's really going to hurt you and so you need to be balanced in your living annuity investment . Your follow-up question around that living annuity was if you've got some money outside of the living annuity , what do you do for that ?

And you know , there you can use you know again an exchange-traded fund or a unit trust to build up your offshore capacity if you feel that you need more . And I think for me that you know combining , you know , a retirement fund and discretionary investments , in other words , investments that are not tied into a retirement annuity or a living annuity .

You know that's a very good idea and certainly maximizing your tax reallocation , you know is a very good idea and certainly maximizing your tax reallocation is a very good call . Thank you so much for your questions . We'll certainly be answering some more in the weeks ahead . Please keep sending them through .

You can go on to Honest Money to our website to kind of find out how to connect to us . Voice notes are really appreciated , but otherwise please send your your messages through to us and we'll do our best to answer them .