Should you be able to use your retirement fund for financial emergencies?

Published on 31st March, 2021 at 10:44 am

In difficult economic times, it’s understandable that you wouldn’t view your retirement pot as anything other than a stash of money that should be accessed in an emergency. While accessing it may be tempting, here’s why it’s not always the best option.

South Africans have a reported enticing R4.5 trillion saved in public and private retirement funds, but accessing these funds isn’t easy, as they’re only accessible if you resign or lose your job. As is evident from the current pandemic, many South Africans are experiencing tough financial times, having either lost their job or seen their income significantly reduced. South Africa’s unemployment rate jumped to a new record high of 32.5% in the fourth quarter of 2020 from 30.8% in the third quarter, according to Stats SA, which put the number of unemployed citizens in South Africa at 7.2 million people.

If you should lose your job and the opportunity to dip into your retirement savings in a time of need arises, it’s understandable to look to this fund to close the gap. It may also seem easier to tap into your retirement savings than to get a loan, as you don’t need to go through a credit check and gather financial documents for the loan application. But there are some serious pitfalls of tapping into this fund prematurely to consider. Even in difficult financial circumstances, is it the right thing to do?

Robbing your future self

The problem with tapping into your pension pot before retirement is that you are effectively borrowing from your future self. This may not sound like a bad thing – after all, it’s only your future self that will need to worry about it – but what it’s doing is making you poorer at a time when you’re vulnerable and likely not able to earn an income. Keagan Phillips, a financial planner at Adjuvo Wealth BlueStar, authorised by Sanlam, explains: “By contributing to a retirement fund, you take advantage of the power of time and compound interest to build up a decent pot of money that will provide you with income for the rest of your life after you retire. Every withdrawal not only takes away the money you contributed and the growth you’ve already earned, but also all the years of growth you would have earned had you left your retirement money untouched,” he explains. “It becomes very difficult, if not impossible, to replace those losses before your retirement. Eventually, your income at retirement is far lower. A withdrawal may save you now, but you will pay a price for it later.”

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The tax impact

Few understand the tax implications and loss of future income (see table below) when drawing from a pension fund. Bennie Wessels, product actuary at Sanlam Savings, puts it into perspective with a practical example. “Suppose John is 45 and decides to withdraw R500 000 from his retirement fund. The first R25 000 will be tax-free, but the remaining R475 000 will be taxed at 18%. He will therefore end up paying R85 500 tax and receive R414 500 after being taxed. If he instead waited until 55 and only withdrew the money when he retired, no tax would be payable and he would receive the full R500 000. Furthermore, John would end up with approximately R1.5 million less in his retirement fund when he retires at 60 – assuming he would have earned an 8% per annum return over the next 15 years on the R500 000 that was withdrawn. Based on current annuity rates R1.5 million could provide John with a R8 500 per month income that increases by 5% annually for the rest of his life.”

What should you do instead?

Instead of cashing in your pension, there are other ways you can survive or prevent financial hardship. These include:
• Saving for a rainy day. Nicki Blignaut, senior financial planner and principal at 2one2 BlueStar, underwritten by Sanlam, says: “Rather save a little less towards retirement and have a rainy-day account. Then you have the best of both worlds.”
• Speak to your creditors. Blignaut says: “If you are battling financially, the first thing to do is speak to the people you owe money to. You would be surprised how many people are willing to help you make a plan, as long as they know you are not running away from debt.”
• Find out if you’re entitled to payment holidays. Blignaut says: “At Sanlam you can take up to a 12-month holiday from paying your retirement annuity. Rather take a break than cash it in or stop it.”
• Cut back on luxuries. Phillips says: “During tough times, as much as luxuries may provide you with comfort, you should be cutting these expenses first.”
• See if you can claim any benefits. “If your financial difficulties are caused by a retrenchment, make sure to claim from the Unemployment Insurance Fund (UIF). The benefits are temporary and will not come close to replacing your income in full, but it is much better than nothing,” says Phillips.
• Consider debt review. “If you don’t succeed, it may be worth considering going through the debt review process to restructure your payments and protect yourself and your assets from legal action,” adds Phillips.

The penalties you pay for cashing in early

For the 2021 year of assessment, see below. For the latest assessment info, click here.

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