Retirement savings are not a lifeline
Immediate needs versus future needs
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.
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).
• Preserving your retirement savings should be high on the agenda. You should always consider preserving your retirement savings as far as financially possible. Investing for retirement is a long-term objective.
There may be many obstacles on your journey to retirement, such as market volatility, retrenchment and changing jobs, but sticking to your longterm plan will get you to your final destination – a financially secure retirement.
• Consider the tax implications. When exploring the prospect of digging into your retirement savings, tax alarm bells should ring. 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. 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 at a tax rate of 36%.
• Use any retrenchment package wisely. 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.
• 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. From March 1 this year, all transfers, whether from a pension or provident fund to a preservation fund, are tax-exempt.