The single biggest destroyer of your wealth

Before the lockdown announcement was made and South African businesses were forced to close for three weeks, which then became five weeks and then indefinite, companies across South Africa were already under pressure and talking about retrenching workers.

Things look worse now and many fear that we can expect large-scale retrenchments in SA this year, note Lauren Davids and Khwezi Jackson, investment consultants at 10X Investments, who sound a warning about what this means for those precious pots of savings being built up by workers for their old age.

“It is no secret that both the public and private sectors were taking strain before the Covid-19 pandemic caused havoc in South Africa, as it has across the globe,” said Jackson.

“Before the coronavirus struck, many South African companies – including South African Breweries, Telkom, Dion Wired/Massmart, Sibanye-StillWater, and at least one of the big banks, to name but a few – were in negotiations over possible retrenchments. Developments at SAA and SA Express have also been looking threatening for some time.

“The Covid-19 pandemic and the lockdown have significantly ratcheted up the pressure on businesses, pointing to a rocky year ahead, possibly even longer, for employers and employees alike.”

An important knock-on effect will be on the country’s retirement readiness, which is already in a rather bad state, said Davids.

The South African Retirement Reality Report 2019, which is compiled by 10X Investments, found that almost half of all South Africans surveyed (46,2%) were not saving for retirement at all, with the overwhelming majority (91%) blaming insufficient means, or other priorities.

Those ranks are likely to swell as many who lose their jobs cash in whatever savings they have, and use them to get through the next few weeks and months.

“The decision to cash in one’s retirement savings should not be taken lightly. Retrenched workers should consider any other options available to them, and should have a good look at what cashing in will cost them over the long-term. At the very least, people should try to preserve some of the savings they have built up over the years,” Davids said.

She said that members of a retirement savings fund who are retrenched have the option of accessing their full provident or pension Fund savings in cash. “Many do so without any understanding of the tax implications, or even giving a thought to how this will set them back on their retirement savings journey.”

Building up capital again might be very difficult, impossible even for some, said Jackson. “Should a withdrawal be absolutely necessary to keep bills paid and to put food on the table, workers should try to access just a portion of their savings and preserve the remainder to grow over time. At least then they will not have to start from zero again.”

10X Investments said that there are different tax implications for different situations, from losing your job because your employer has closed down to accepting voluntary retrenchment from a company that is restructuring.

In many cases, cashing in your retirement savings early will mean you are liable to pay tax on your savings. You might also be using a tax-free withdrawal that applies only once in your life. “Make sure you understand what the full tax implications of your decision are,” Jackson stressed.

“Instead of emptying out your savings and possibly forfeiting a chunk to the taxman, your investment balance, or part of it, can be preserved tax-free in the fund you are in, or in another approved retirement fund, such as a pension or provident preservation fund, a retirement annuity, or – for the lucky ones who find work immediately – a new employer’s fund.”

Another danger, which can be more damaging than tax over time, warned Davids, is the fees you pay on your investment.

“Seemingly small regular charges against savings compound to leave a huge hole in people’s pensions. For example, in the context of a consistent 40-year savings regime, someone paying 3% in fees rather than, say, 1% p.a., receives almost 50% less money at retirement.

“Try to maintain the total cost of your investment to close to 1% or less. Do your research to enable you to make an educated and informed decision best suited to your situation and needs,” she said.

Read: Here’s how to better understand your company pension scheme

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