PENSION SAVINGS OR SETTLING DEBT?

I have some short-term debt to settle and want to increase my repayments for a few months to reduce the sum. I have little in the way of excess money to do this, so I wonder if I should take a break from my retirement savings. Would it make a huge impact to my savings overall if I took a break for six to12 months? I’ve heard you can pause and then resume your retirement savings – is this the case, and what are the consequences? I am 35 and contribute R2 000 a month to my retirement annuity, where I have accumulated R250 000.

Name withheld

Pierre de Bruyn, a financial adviser at PSG Wealth in Northcliff, responds: It is possible to stop and resume payments to a retirement fund, but, before taking this decision, I would advise you to ask a financial adviser to check whether your specific contract has any penalties. If there are, they can outweigh the benefit of paying the debt off early.

If there is no penalty, and assuming you are paying an interest rate of at least prime plus 1% to 3% on the debt, it would seem realistic to pay off the debt, because it is unlikely that you will achieve a higher guaranteed return in a retirement fund over the short to medium term.

The counter to this is that the payments to the retirement fund are tax-deductible. The tax benefit that you gain by paying into a retirement fund with pretax money can be substantial, depending on your marginal tax rate. Without knowing the specifics of your case relating to interest and income tax rates, I cannot do an accurate calculation to give you a definitive answer.

The decision should ideally be addressed as part of an overall financial plan, which incorporates dealing with debt and creating long-term retirement funding assets. Dealing with debt in isolation might not yield the best results. I recommend that you approach a qualified financial adviser to assist in this decision, considering the overall impact on your portfolio.