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A Fin24 reader facing financial hardship wants to know if it would be possible to get a loan, and access his provident fund. He writes:
I'm in a financial bind and would like to take a loan from my provident fund; my salary is also down by 50%. How can I get a loan? How do I go about it?
Debbie Ryan, certified financial planner, at the Financial Coach responds:
Currently, as the law stands, you may not apply for a loan from your provident fund, but there are a few things to consider.
Unfortunately, being in a financial bind these days is not uncommon. That, coupled with losing half your salary, is a recipe for tough times. It is easy to look for the Band-Aid, to look for that quick fix that will allow you to continue the lifestyle you have been living.
Your Band-Aid at this time would be withdrawing from your retirement fund savings. This quick-fix is basically stealing from your future self. Who is your future self? Your future self is a much older you needing money monthly, as you do now, but having no further means to generate an income.
As it currently stands, legislation does not permit access to provident funds unless you resign or retire. There is provision for housing loans or home improvement loans against retirement funds, but not for general financial assistance. So, the only way you could access your funds at this point would be to resign.
There is, however, a proposed amendment due to be implemented in March 2023. The proposed change is to be known as the "two-pot system". The proposal is that up to one-third of funds contributed post-March 2023 may be withdrawn on an annual basis, this is to be known as the "savings pot", and the remaining two-thirds will need to be left for retirement, to be known as the "retirement pot". Each fund must incorporate the "two-pot system" as part of its rules.
Retirement funds are implemented with the sole intention of providing an income for retirement. For this reason, should the two pot system be made available, I do not recommend accessing these savings prior to retirement. Building up these funds takes years of contributions and growth, which can easily be destroyed by dipping into them prior to retirement. Very seldom, have I heard someone say they have saved too much for retirement. On the other hand, I have often met people with insufficient funds to see them through retirement. On a life timeline, we can work for about 40 years, but thereafter, we could need to have accumulated sufficient funds to take care of ourselves for another 30 years. That is a long time - we need to keep whatever we can invest for our retirement.
Before looking to access retirement savings, there are a few considerations. If your salary is down by 50% - is this a permanent or a temporary situation? If it is a temporary situation, maybe it is time to start looking for means to supplement your income or look for another job. If that is not possible, it is time to start cutting back on non-essentials. If the lower salary is permanent, this could mean looking for a new home with lower rental payments or selling your vehicle with expensive monthly repayments and buying a lower-cost vehicle with no repayments. When tough financial times arise, facing them immediately is better than getting yourself into a worse situation by living beyond your means.
Further to this, how can we possibly prevent something like this happening? This is where an emergency fund is so important. We should look to build up between three to six months of income in a good money market account. These funds can be used for day-to-day emergencies (like new car tyres), but if something unexpected happens and we suddenly have no income or our income is reduced, we have funds to fall back on. An emergency fund gives you time to catch your breath and make another plan.
Questions may be edited for brevity and clarity.
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