You may have lost your job and income because of Covid-19. The first thing to realise is that you’re not alone and that your retrenchment was not of your own doing. Businesses throughout South Africa, no matter the industry, are suffering. The second thing is to know that the worry you’re feeling is normal; losing your income is one of the most stressful things that can happen to you. Two of the big questions arising from the loss of a job are as follows:
If you were part of your employer’s pension or provident benefit scheme, you will have the option of partially or fully withdrawing your savings from the fund. Alternatively, you can transfer those savings into what’s known as a preservation fund. This is not your only option, but it’s one of the more common given the benefits involved. Let’s first look at the implications of withdrawal.
Withdrawing your savings
Using your retirement savings to make ends meet while you’re unemployed should be your last resort. It boils down to the money you’ll give away in tax. Any amount withdrawn before your retirement age (above R25,000) will attract tax on a sliding scale illustrated below.
|Amount withdrawn||Tax payable to the government|
|R0 – R25,000||No tax payable|
|R25,001 – R660,000||R0 + 18% of amount over R25,000|
|R660,001 – R990,000||R114,300 + 27% of amount over R660,000|
|>R990,000||R203,400 + 36% of amount over R990,00|
To illustrate, if you have R300,000 saved and you choose to withdraw the full amount, you’d pay R49,500 [(300,000 – 25,000) x 18%] in tax. What are the repercussions of that tax paid?
1. The tax you pay now is money lost that could have grown in your retirement vehicle and afforded you a better retirement.
2. Withdrawing from your retirement savings has negative consequences for the life you imagined living in retirement.
Withdrawing from your retirement savings might be unavoidable. But it’s entirely possible that your financial adviser can offer advice on how to reduce your monthly expenses to avoid, or even just delay, such action. It’s critical you tap this resource before dipping into your life savings. They can also talk to you about the benefits of a preservation fund under a job loss scenario.
A better choice
Transferring your retirement savings into a preservation fund is advisable when you get retrenched. The major benefit is that your savings will not be taxed upon transfer, which means there’s a greater chance you experience the retirement you desire. Nor will income tax, dividend tax, or capital gains tax be levied on the investments inside your preservation fund.
You are also permitted one withdrawal from a preservation fund (up to 100% of your savings) before you reach the age of 55, so there’s some flexibility should it be required. Again though, we discourage such a withdrawal as the same taxation schedule detailed above will apply. Something else to keep in mind; if you’re worried about personal insolvency, and creditors coming after your assets, a preservation fund protects your life savings from such litigation.
Perhaps one of the greatest benefits of transferring to a preservation fund is that it gives you an opportunity to reassess how your savings are invested. Many of us rely (or relied) on our employers to guide us on how to invest our life savings. Many were not equipped to do so. Use this transition to make sure you’re invested appropriately given your retirement goals. Rope in your financial adviser if you’re unsure how to tackle this on your own.
And while you’re speaking to that adviser, ask about how to put an emergency fund into place so that if you’re ever faced with a similar situation again, you’ll have a buffer to protect your retirement savings and give you some peace of mind.
Where to from the preservation fund?
Once you find another avenue to apply your skillset and you regain an income, you have the option to transfer your preservation fund to your new employer’s benefit scheme. Or you can leave it to work its magic until you retire. In the latter case, you still have the flexibility to change the underlying investment strategy to better suit your evolving investment objectives and risk tolerance.
But you cannot make further contributions to a preservation fund outside of the initial transfer of assets. So, you’ll need to contribute to your new employer’s pension or provident fund, or to a non-employer-based vehicle like a retirement annuity or tax-free savings account. It’s critical that you start to contribute toward one of these savings vehicles as soon as you can afford to.
Speak to your advisor
This is an immensely difficult time for many of us. And it’s only natural to be anxious about the uncertainty that now prevails, especially if you’ve lost your job. But you do not have to shoulder the burden on your own. Often it can be difficult to see the solution to problems we’re not familiar with. Let your financial adviser help you as you would your doctor in times of poor health.