With record levels of unemployment and millions of retrenchments hitting the South African workforce, retirement savings become a convenient lifeline for people who have lost their jobs. But there are consequences.
2020 was the year of the retrenchment and unfortunately, 2021 may not fare much better as the world continues to fight the effects of Covid-19. The latest Statistics SA Quarterly Labour Survey found that the number of unemployed persons increased by 701 000 to 7.2 million in the fourth quarter of 2020 following an increase of 1 million in the previous quarter – putting the retirement plans of millions of South Africans jeopardy.
Shameer Chothia, Consultant at Momentum Corporate Administration and Advice, believes that in light of this, it has never been more important to think carefully about your retirement savings if you’re facing retrenchment. You should consider all your options, including:
- Preserving all your savings in the retirement fund where it is invested, even though you are leaving the employer (This is known as in-fund preservation)
- Transferring your savings to a preservation fund
- Transferring your savings to your new employer’s retirement fund or a retirement annuity fund
- Taking part of your savings as cash to meet immediate needs and preserving the balance
- Withdrawing all your savings as cash
Preserving your retirement savings should be high on the agenda
Chothia emphasises that you should always consider preserving your retirement savings as far as financially possible. “Investing for retirement is a long-term objective. It’s a bit like taking a long drive. Say you are driving from Johannesburg to Durban but an hour outside Johannesburg you hit roadworks. Are you going to go back home or wait until the roadworks end so you can progress and reach your destination?
“There may be many obstacles on your journey to retirement, such as market volatility, retrenchment and changing jobs, but sticking to your long-term plan and staying invested through the ups and downs will get you to your final destination – a financially secure retirement. It’s important that you don’t allow retrenchment today to derail your way of life for tomorrow.”
Consider the tax implications
When exploring the prospect of digging into your retirement savings, tax alarm bells should ring in your head. “Although special tax rules apply to voluntary severance packages, liquidating your pension or provident fund is taxed at a high rate in accordance with the retirement fund withdrawal tax table,” says Chothia.
You may end up giving away a lot of your hard-earned retirement savings to the taxman, especially if you withdraw the full amount. For example, depending on your tax bracket, if you have R1 million in your retirement fund and withdraw the full amount, you’ll pay tax a tax rate of 36%. “I don’t know about you, but seeing 36% of my retirement savings disappear will not feel good. You’ll need a good reason for doing so.”
Use any retrenchment package wisely
What if you’re unable to find new employment or another source of income by the time you leave your existing employer? Chothia still recommends that you consider preserving your retirement savings if at all possible, especially if you’ll be receiving a retrenchment package from your employer. Look at how you can cut back on any unnecessary expenses and stretch your retrenchment package as far as possible to meet immediate needs rather than tapping into your retirement savings to maintain your current lifestyle.
“If you keep your retirement savings well preserved and untouched, you can reap the rewards of compound interest and watch your money grow on its own. The more you take out, the less it will grow and the more you will be taxed.”
What about withdrawing only a portion of your retirement savings?
If you belong to a group pension or provident fund, you will know that these types of funds are linked to your employment. When you leave your employer, you can choose to take a portion of your retirement savings and transfer the balance into a preservation fund. “This means that if it’s really necessary, you can access some of your retirement savings to meet urgent needs and preserve the balance which, will have grown into a much larger amount by the time you reach retirement.”
From 1 March this year, all transfers, whether from a pension or provident fund to a preservation fund, are tax-exempt.
“Explore all your options before opting to cash in your hard-earned and irreplaceable retirement savings. It’s also important to always consult with a qualified financial adviser for advice tailored to your personal situation, as the rules of retirement funds differ. In addition to this, if you are part of an employer-sponsored retirement fund, you have access to benefit counsellors who can give you all the information you need on the options for your retirement savings to help guide you on your journey to a financially secure retirement.”