Consider your older self before raiding pension

South Africans have been in lockdown long enough for it to start feeling almost normal, but that does not discount the fact that Covid-19 has had, and will have, a dramatic impact on many people’s financial future. This is especially true for people who have been laid off in recent weeks, or who have seen their salary reduced or their pension fund contributions deferred as their employers try to make ends meet.

We have seen a dramatic increase in enquiries from people asking what will happen to their retirement savings if they have been laid off and if they could perhaps draw on these savings to survive lockdown and the post-lockdown period.

The government is making a special provision for pensioners who are currently living on their living annuities. It is expected that for the next four months, you will be able to increase your withdrawal to a maximum 20% (from 17.5% before) or decrease it to a minimum of 0.5% (from a minimum 2.5% before), calculated on an annualised basis.

This is being done to either help you cover the gaps (in the case of the increased maximum) or preserve as much of your savings as possible until some stability returns to the world at large.

It is totally normal to start looking at your pension fund savings as a possible source of income after being laid off. After all, the needs of your grey-haired future self are very abstract when compared to your current needs. This is especially true when you no longer have an income and the chances of finding a new job are looking increasingly slim amid locked doors and closed businesses.

But withdrawing your life savings before retirement is very risky, very tax inefficient and thus very expensive and often prohibited.

For tax purposes, and not considering special cases involving special industries or ill health, you are allowed to retire from your retirement funds after the age of 55. At this age, you can withdraw up to one-third of your savings in a lump sum and you have to use the rest to buy a monthly pension income (annuity income).

If you have invested your savings in a preservation fund, you are allowed one withdrawal before the age of 55.

That withdrawal can be as small or big as you want it to be, but you forfeit any future opportunities of withdrawing a lump sum again before the age of 55.

We will return to this later, but be sure that an early withdrawal should almost never be considered as an option. As Covid19 has proven, the world can change in an instant and you should be very, very reluctant to touch your life savings without knowing what the future will hold or how else you are going to sustain yourself when you reach your retirement age.

You should also keep in mind that the Covid-19 pandemic was accompanied by one of the most violent market crashes in recent years. So withdrawing your pension savings now will be even worse, because in all likelihood your pension savings will now be worth much less.

Some companies have in this time opted to temporarily cease your pension fund contributions, as well as their matching contributions. This is completely legal, provided that they have discussed this with you and the fund rules provide for this. It should also be a shortterm solution to help you cover your everyday needs, while helping your employer to manage the company’s cash flow.

It is important to note that this should only be done if your employer has consulted with you. It is unfortunately very common for unscrupulous employers to withhold their pension fund contributions without telling you. If you are concerned that this might be happening, contact your pension fund directly to find out if your contributions are up to date. If not, ask the trustees what they are doing to recover those contributions. If you are not satisfied with their response contact the Pension Funds Adjudicator.

If you get laid off and are able to access your pension fund savings, try not to do so unless absolutely necessary. Live as frugally as you can and use your severance pay first before you access your retirement savings, as you should leave as much of it as you can for your future needs.

This is an unprecedented time and the uncertainty is enough to drive anyone crazy. Keep in mind that the choices you make now will influence the rest of your life. Be calm and seek professional advice from an independent certified financial planner professional.

Fourie is CEO of Ascor Independent Wealth Managers, 2015/2016 FPI financial planner of the year and a co-author of The Ultimate Guide to Retirement in South Africa