Question:
Is it better to pay an outstanding bond with ones Provident fund when leaving a company or better to invest into a Provident Preservation Fund? The trade off question is would the fund make a better after tax return? the answer should be yes that their compound annual return after tax is better than the bank costs?
Answer:
Darrell, Over the long-term, you should earn a better return on your provident fund than the interest rate you pay on your bond. However, this may be not always be the case over shorter periods (invariably when bond rates go up, the markets tend to come down). Also note that if you use your retirement fund to pay off your bond, then you have essentially just replaced one loan with another. You have borrowed from your future self to pay off your current debt. So if you don't repay that loan (out of your bond repayment savings) in addition to your normal retirement provision, you will find yourself in a big hole come retirement - you won't be able to meet your retirement debt (that is, your retirement living expenses). We don't normally offer advice in this forum, but we do recommend that you preserve your retirement fund and pay off your bond out of your current income. That will keep you honest as to how much money you really have to spend each month, and when you retire, you will be highly grateful that you did this. Kind regards Chris Veegh
