MONEY CLINIC | I'm under debt review and expecting a pension payout of R900k. Where do I start?

A Fin24 reader who is under debt review and about to resign wants to know what they should do with their pension payout.

They write:

I'm planning on resigning as a government employee after 20 years of service. I expect a pension payout of R900 000. I'm under debt review, and I owe creditors R280 000. I plan on pursuing real estate entrepreneurship. I'm aware that when I resign, I will have no source of income. What should I do about my debt, and where do I start to pursue my dream? 

Benay Sager, chief operating officer at DebtBusters, responds: 

As a disclaimer, we do not give financial advice, especially on retirement-related matters. So the below comments cannot be construed as financial advice. However, we can try to answer this question by sharing our own experience in the debt counselling industry.

As a starting point, we want to congratulate this consumer for their dedicated work as a public sector employee for 20 years – that is an amazing achievement. The consumer wants to start a new business and is considering using the lump sum payment to do so. At the same time, they are under debt review and still owe money to creditors. So, they have the dilemma of whether to use a lump sum payment to reduce debt or use it to start a business. 

Debt review is an effective way of paying back debt, and it works best when someone has a source of regular income. If a consumer under debt review receives a lump sum payment, it is always advisable (and is expected by the creditors who are still owed money) to use this lump sum payment to settle the outstanding debt. It may even be possible for the consumer to negotiate (via their debt counsellor) further reductions in the amount owed to creditors if they are making a lump sum payment. Often towards the end of a year, creditors are more willing to settle outstanding debts with lump sum payments and usually encourage this by offering discounts. 

It is also conceivable that the consumer will want to access further credit as they grow their new business. By settling the debt with the lump sum payment, the consumer will be free of debt, and therefore will receive a clearance certificate, allowing them to have access to further credit should they need to do so. If they do not settle their outstanding debt (using the lump sum), the consumer will continue to be flagged as being under debt review with the credit bureaus and unable to access further credit – hence another reason to settle the debt with the lump sum. 

Therefore, we would advise the consumer to settle their debt with the lump sum money. With the leftover money, the consumer can start their business and hopefully generate a new source of revenue/income for themselves. 

Questions may be edited for brevity and clarity.