What’s the impact of withdrawing from my investments?

Published on 25th February, 2022 at 04:24 pm

Facing loss of income or even retrenchment, many of us have had to withdraw money from long-term savings to help us with short-term expenses. We take a look at the responsible ways to handle an investment withdrawal.

South Africans have been hard hit by a downturn in economic fortunes. The economy was struggling even before COVID-19, but the hard lockdown resulted in a jobs crisis. Unemployment has reached its highest level, at 34.9%, and people are feeling the pinch of higher prices and less income to go round.

Investment plans have been upended. Eight in 10 pension funds reported that their members experienced a reduced annual increase, reduced pay, or a sabbatical without pay, according to the Sanlam Benchmark Survey 2021. Many suspended their retirement contributions during 2020. This provided temporary financial relief, but may have a longer-lasting economic impact.

What to do in times of financial crisis

Take control of your spending

Have a look at these four tips for handling tough financial times. Contact a financial planner who can help you manage your finances and reduce the impact on your long-term goals.

Speak to your bank

“Do this as soon as you know your salary will be cut. Don’t just go into crisis mode and think your retirement savings will save you,” says senior financial planner at 2one2 BlueStar, Nicki Blignaut. Examine your expenses, look at ways to cut back and extend payment terms for debt. If you’re receiving a retrenchment package, see how long you can make it last. Using your retirement savings should be a last resort.

Leave your pension fund alone 

“Conventional wisdom holds that you should reduce your debt when you get retrenched. As a result, many people withdrew their pension funding and settle their home loans. Unfortunately, that is never the best recommendation,” says investment specialist Jaco van Schalkwyk, a financial planner at Plan-B BlueStar. Direct withdrawals from your pension fund are taxed at up to 36%, and that’s a permanent loss to you, which you can never replace, he says.

Instead, transfer your entire pension savings to a preservation fund tax-free. You can then choose to withdraw a portion from the preservation fund, with full control over the amount you choose to take out and therefore the tax you will pay. You can withdraw up to R25 000 tax-free until you’re 55, when this limit changes to R500 000 tax-free. Van Schalkwyk cautions that you should take out as little as possible – and that preservation funds give you the power to choose how much, and when, you withdraw your savings.

When you have more financial stability, put as much back into your retirement savings as you can. You can also start an emergency fund that’s separate to your bank account, with a regular monthly contribution.

Want to develop more resilience? Check out these five ways to future-proof your career, finances and health, without it costing a thing.

The degree of flexibility offered by different investment products:

Tax-free savings account

Save up to R36 000 tax-free every year, and grow your money faster because you don’t pay tax on the investment return. Choose an investment option to suit your objectives and risk profile, with a lifetime contribution limit of R500 000. You can stop contributions or withdraw at any time. However, every withdrawal uses up part of your lifetime limit of R500 000 for tax-free savings.

Endowments

With limited flexibility and tax-free withdrawals after your policy has matured, these products are good for long-term savings goals. You can make only one withdrawal and one loan within the first five years, and may face early termination charges. After this period, you have unlimited access to tax-free withdrawals, and you can use your savings as you would like. You can also stop your contributions at any time.

Investments made through an endowment policy are taxed at a fixed rate of 30%. If your marginal income tax rate is higher than this, an endowment policy could be a good option for you.

Shares and unit trusts

Shares and unit trusts give inflation-beating growth over the long term. You are liable for capital gains tax when selling shares and unit trusts, and any income you receive from this investment is taxable at your marginal tax rate.

Retirement annuity

Retirement annuities offer significant tax benefits. Contributions to retirement savings reduce your taxable income (up to a specified limit) so that you can save more, and growth on your investment is tax free. Contributions in excess of the limit can be carried forward and deducted from future taxable income, including a retirement lump sum or pension income. You can increase, reduce or stop payments at any time. However, you can’t access your funds before the age of 55 – unlike a preservation fund.

A small monthly investment can make a big difference in your retirement savings outcome years from now. Want to know how much you should put away monthly to reach your retirement savings goal? Use this retirement calculator to get started.

When you retire, you can take up to a third of your contributions in a cash lump sum and use the rest to provide a monthly income for yourself. Regular pension payments are taxed as income, but tax rebates, rates and allowable deductions change at ages 65 and 75. This means that by waiting until retirement you will pay less tax on your withdrawal.

Are you going through a tough financial time? Speak to an expert financial planner who is best placed to advise you based on your personal portfolio and needs. Click here to set up a meeting with one today.