Accessing retirement savings before retiring like stepping into quicksand
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The recent announcement that the government is looking at ways to allow people to access their retirement savings in an emergency as from next year may have given many people hope that their financial woes are about to end.
Andrew Davison, chair of the Investments Committee of the Actuarial Society of South Africa (ASSA), cautions however that the decision to access a portion of your retirement savings should not be taken lightly.
“Before you breathe a sigh of relief, and possibly even take on additional debt to bridge your current financial woes until the emergency access becomes a reality, it is critically important that you understand that whatever you take from your retirement savings now is likely to cause a shortfall in your retirement years at a time when you may have few alternative options of finding additional income.”
Davison compares accessing your retirement savings before retirement to stepping into quicksand. “It seems like no big deal but it’s almost impossible to regain solid financial footing once your retirement savings have been reduced. So while this decision might rescue you from a difficult financial position now, if you don’t refill the ‘hole’ in your finances at some point between now and retirement, then it will most likely sink you later in life when your age, and possibly your health, might leave you with few options.”
Lack of preservation a concern
Davison says the lack of preservation of retirement benefits by South Africans has long been of grave concern. He adds that ASSA therefore welcomes the announcement by the National Treasury that government is working on a “two-bucket system” aimed at ensuring future mandatory preservation upon resignation from a job while at the same time allowing limited pre‐retirement withdrawals from retirement funds.
He points out that the current crisis necessitated that government explore various options to alleviate financial hardship in the short term and one of these options is allowing people to access their retirement savings. He adds that at the same time this also provided government with the opportunity to make some much needed changes to the system to enhance people’s chances of accumulating enough capital by the time they reach retirement.
Current laws prohibit members of pension and provident funds from accessing their retirement savings unless they leave their jobs or retire from their funds. Employees who had their salaries reduced during the Covid-19 pandemic or suddenly became sole breadwinners after spouses or partners lost their jobs, therefore found that they were prohibited by law from touching their retirement savings.
This means that only people who lost their jobs during the Covid-19 pandemic had the option of taking their retirement savings in cash, minus a hefty tax portion. Employees who opted for early retirement were allowed to take one third of their pension benefit as a lump sum, unless the value was less than R247 500, or their provident fund benefit as a cash lump sum (less tax). Members of a retirement annuity (RA) fund are not allowed to access their savings before the age of 55.
Davison says saving for retirement is challenging and although it is possible to save enough to be able to maintain one’s standard of living, it takes dedication, discipline and patience. “Sadly, only a few South Africans get it right. For the rest, it means hard decisions about lowering standards of living, relying on family for financial support or queuing in the SASSA line for the meagre older person’s grant.”
The importance of planning for emergencies
Davison points out that the National Treasury has clearly stated that access will be once off and limited and will be tied, in future, to mandatory preservation. “In other words, the current ability to cash in all retirement savings when changing jobs is likely to be more limited in future.”
He says it should be noted that this will only apply to future savings and not to the existing accumulated savings that people have – as always, vested rights will be protected. The recent provident fund annuitization provisions, for example, only apply to contributions made after 1 March 2021.
Davison says once finalised and implemented, probably only sometime next year, the “two-bucket system” will require South Africans to learn to also save for emergencies, not just retirement.
“Retirement is not the only reason to save. Savings are essential to enable people to put down a deposit on a property, pay for children’s school fees, take a well-earned holiday and, very importantly, to provide for unforeseen shocks or so-called rainy days. Savings build resilience to enable people to withstand life’s knocks. In terms of knocks it doesn’t get much more brutal than the Covid-19 pandemic, which has left many people’s finances exposed.”
Davison says the challenge is that many people have little or no savings outside of the savings they set aside every month in their employer’s pension or provident fund. “In many cases, they actually have negative savings in that they have substantial debt. No savings and a pile of debt means people are extremely vulnerable to a loss of their monthly income.”
If you are currently only saving for your retirement, Davison recommends that you consider shock-proofing your finances by also building up an emergency fund big enough to tide you over for at least three, but preferably six, months should you or another breadwinner in your household fall on tough times.
Davison points out that there are significant benefits to having savings in a retirement fund, including the advantages of tax-free growth as well as significantly lower fees than in a similar personal investment vehicle. The ideal situation, according to Davison, involves having savings in a retirement fund that are designated for retirement and then also having savings in personal savings vehicles that provide for shorter term needs and emergencies. All savings benefit immensely from the impact of compound interest - the longer the period, the bigger the benefits because compound interest needs time to work its magic.