JOHANNESBURG - People servicing their debt or home loans should also save on the side and not use pension money to pay-off their loans.

These findings emerged at a media roundtable for savings hosted by Absa. 

 “It’s about putting yourself in a situation whereby you are not tempted to dip into your savings. Paying your house can be a form of saving but you need to put your money in vehicles that you can’t touch. You need to pay your debt and on the other side have money earmarked for your retirement and other savings,” Johan Gouws, the chief investment officer at Absa Investments said.

“It’s possible that your retirement saving, if you give it enough exposure could outperform the return on your house. It’s about having different savings strategies.”

Gouws said paying off debt was not a bad idea, but using the bulk of your pension after changing a job, to pay off debt may be counter-productive. If one used their pension to pay-off debt it could mean that the person will lose out on the compound growth in interest he/she would have earned on using your retirement income.

One of the dangers of withdrawing retirement funds before maturity to either pay-off your mortgage or other short-term debt is that the individual concerned stands to lose out from the benefit of compound interest.

An example would be that, if you have R1 000 and you get a 10% interest every year, by the next year your interest increase will be R100. so when you use your retirement income and pay-off debt, it means your compound interest will start from a low base and by the time you need to retire it may not be enough.

In some circumstances people used their pension to pay off their car loans, but after some time they still went on to obtain another vehicle finance loan because of a desire to buy a new car.  Those who only used high mortgage payments as a saving method without other alternative savings faced a risk of not having enough money to cover for an emergency. The other thing is that your house will not pay for your bread and milk if you have lost your job and do not have savings on the side.

“make sure that your financial planning includes all areas of your household needs which could include paying off your debt, education, retirement and large purchases. It’s proven through customer behaviour that if there is no focused financial discipline then a shortfall arises from the event,” Absa Retail chief executive, Gavin Opperman said.

The high household debt to disposable income ratio of 78% is expected to impact on savings as is the expected increase of 250 basis points in the repo rate in 2012, according to Absa. The average household savings as a percentage of GDP was 1.5% in the first quarter of 2011, according to Absa.

Absa’s managing executive for entry level banking, Lawrence Twigg, said in order to drive a higher savings rate, banks first needed to consider the fact that some people were excluded from the savings pool. Twigg said Absa was deploying cash acceptor ATMs in remote areas, so that people can deposit funds to encourage savings.

Opperman said savings was also good for the economy and it encouraged banks to lend more for domestic investments. he said the low savings culture forced banks to borrow funds from abroad, something that could make lending more expensive as the cost of funding increases.

Opperman also mentioned that the impact of the strikes in the country will not only impact production but will also put pressure on debt repayments as some workers will have to forego a portion of their salaries.

However, he said he was optimistic that Absa’s banking structure was robust enough and the bank would respond proactively in order to deal with defaults. 

<a href="http://www.moneyweb.co.za/mw/view/mw/en/page292516?oid=548290&sn=2009+Detail&pid=287226tag:news.google.com,2005:cluster=http://www.moneyweb.co.za/mw/view/mw/en/page292516?oid=548290">Pay your debt, while saving - Absa advises