On the back of Covid-19 and the widespread financial difficulties that many people experienced due to two years of lockdowns, some employees opted to resign from their jobs to access their retirement savings.
Elize Giese, chief executive of employee benefits at FNB, said there are several reasons why this is a bad course of action to take.
“For one, there are significant tax implications if you choose to take your benefit as a lump sum. You will only receive a tax-free amount of R25,000, and the remainder of your benefit will be taxed on the withdrawal benefit tax table.
“More concerning is the fact that you will probably never be able to fully make up the savings that you withdraw during the rest of your career, which means that you are effectively dashing your hopes of ever being able to retire with financial security.”
Giese said that when you withdraw your retirement savings early, you’re not just taking money from your retirement, you’re also taking time, and that means you effectively lose out on all the growth and compound interest that money would have earned if it had stayed invested until your official retirement date.
Lack of understanding
Giese points to an even bigger problem revealed by this desire by some to resign to access their retirement savings, and that is a fundamental lack of understanding that there are different types of savings, each with its own set of underlying ‘rules’ for success.
“While there has been a massive amount of information about saving shared with the South African public over the years, the much-needed savings culture still hasn’t materialised, and at FNB, we believe one of the key reasons for this is the fact that this educational material has not highlighted the importance of understanding that not all savings are created the same.”
Giese said that by lumping retirement savings, fixed-term and call accounts, day-to-day savings vehicles, emergency savings, tax-free savings and even many forms of investments together under the banner of ‘savings’, a misperception has been created that all these savings vehicles are more or less the same.
Many do not realise that each type of savings account has a unique purpose and requires a different mindset to deliver on that purpose, she said.
While understanding the different forms and uses of savings accounts will stand people in good stead, Giese acknowledges that it probably isn’t helpful for those who have an immediate need for money due to the pandemic.
However, she urges anyone in this situation to exhaust every other possible option before resigning to access their retirement benefit. “If you are still employed and earning an income, there’s a good chance your bank may give you a credit facility that will help to tide you over without devastating your retirement plans.”
Giese also points to the critical role that employers have to play in the education of South Africans about financial literacy, the various forms of savings, and how best to utilise them.