On the back of Covid-19 and the widespread financial difficulties that many people experienced as a result of two years of lockdowns, some South African employees opted to resign from their jobs to access their retirement savings.
There are many reasons nobody should be taking this course of action.
For one, there are significant tax implications if you choose to take your benefit as a lump sum.
You will only receive a tax-free amount of R25 000 and the remainder of your benefit will be taxed on the withdrawal benefit tax table. But more concerning is that you will probably never be able to fully make up the savings that you withdraw during the rest of your career, which means that you are effectively dashing your hopes of being able to retire with financial security.
The reason for this is that when you withdraw your retirement savings early, you’re not just taking money from your retirement, you’re also taking time, and that means you effectively lose out on all the growth and compound interest that money would have earned if it had stayed invested until your official retirement date.
There is even a bigger problem revealed by this desire by some South Africans to resign to access their retirement savings: and that is a fundamental lack of understanding that there are different types of savings, each with its own set of underlying “rules” for success.
While there has been a massive amount of information about saving shared with the public over the years, the much-needed savings culture still hasn’t materialised.
By lumping retirement savings, fixed-term and call accounts, day-to-day savings vehicles, emergency savings, tax-free savings, and even many forms of investment together under the banner of “savings”, a misconception has been created that all these savings vehicles are more or less the same. And the result is that many people don’t realise that each type of savings account has a unique purpose, and requires a different mindset to deliver on that purpose.
Creating a culture of successful saving requires us to unlearn these misconceptions about saving, and relearn the correct way of approaching our savings behaviours, which means that comprehensive education is needed, particularly regarding the differences between short-term saving, long-term saving, retirement investment.
It is only through understanding these differences that people will begin to realise that while it is acceptable to dip into a short-term or emergency savings, account to fund immediate financial needs, the same doesn’t hold true for long-term savings and even less so for your retirement savings.
This is because those long-term savings are almost always linked to a big goal that you want to achieve later in life – so plundering the savings you have accumulated essentially robs you of that goal.
Of course, while this understanding of the different forms and uses of savings accounts will stand people in good stead, it probably isn’t helpful for those who have an immediate need for money due to the pandemic.
However, I urge anyone in this situation to exhaust every other possible option first.
If you are still employed, and earning an income, there’s a good chance your bank may give you a credit facility that will help to tide you over without devastating your retirement plans.
- Giese is CEO of employee benefits at FNB.
Follow @SundayWorldZA on Twitter and @sundayworldza on Instagram, or like our Facebook Page, Sunday World, by clicking here for the latest breaking news in South Africa. To Subscribe to Sunday World, click here.
