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Retirement, resignation or retrenchment: Navigating the current economic environment when making tough decisions

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The national lockdown continues to impact many organisations in South Africa. As a result, some employers have reduced the size of their workforce to help alleviate the financial strain on their businesses.

Earlier this year, StatsSA announced that South Africa’s unemployment rate is now at 32.5%, the highest it has ever been since the current measure was established in 2008. This is a significant impact on South Africa’s total labour force, which was just over 22 million in December 2020, as reported by StatsSA.

If you, as an employee and member of a retirement fund, are affected by retrenchment, resignation from your current job or nearing retirement, it is important to understand and consider all options available to you before making financial decisions, to ensure that you can still meet your retirement goals as best as possible in the current economic environment.

What are your options if you resign or are retrenched?

If you resign or are retrenched, you would typically have the option to keep your accumulated retirement savings in your current retirement fund, move it to a preservation fund or withdraw it as cash.

While having additional cash may be attractive during times of uncertainty, it is important to understand the consequences of cashing out your retirement savings before retirement. One of the consequences is that the cash withdrawn from your retirement savings will be subject to income tax, reducing the amount you would actually receive in your bank account. This, however, is not the case for cash withdrawals of R25 000 or less, as the once-off tax-free withdrawal threshold would apply.

In making the decision to withdraw cash from retirement savings prior to retirement, the short-term benefit of having cash at hand today should be weighed against the long-term impact of effectively saving less towards your long-term retirement goal in the future.

Alternative options are available that enable you to preserve your retirement savings. You can either keep your savings invested in the retirement fund which you are currently a member of or invest your accumulated retirement savings in another preservation fund. In these instances, there are no tax implications retirement savings that are preserved, meaning you are likely to have more money at retirement compared to a scenario of cashing out your retirement savings. Employees who choose to preserve their retirement savings still have the option of withdrawing their preserved money before retirement.

Withdrawing cash prior to retirement may be helpful if your financial situation changes and you need access to cash, however, this option should be used with caution as it may negatively impact your retirement goal and the ability to have enough money to live a comfortable retirement.

The impact on one’s retirement outlook when withdrawing all accumulated retirement savings prior to retirement is greater for older individuals, compared to younger individuals, as they have less time left during their working life to save towards retirement.

What are your options if you are retiring?

Many individuals’ investments have been impacted by COVID-19’s effect on underlying assets and financial markets all over the world. If you are an individual retiring during this time, the impact of COVID-19 may have caused a significant amount of uncertainty about your retirement outlook.

However, annuity options are available to meet investors’ needs in all economic environments, including the current one. An annuity provides a member with a regular income in retirement. The two main types of annuities available in the market are guaranteed annuities and living annuities.

What is a Guaranteed Annuity?What is a Living Annuity?
This annuity provides you with an income for the duration of your remaining life as well as a choice of how your income would increase in future years.   For example, you may choose a level annuity where your income remains the same throughout your retirement. Alternatively, you may choose an increasing annuity where your increases can be a fixed percentage, CPI-linked, or driven by the performance of an investment portfolio.   The starting income for a guaranteed annuity is currently higher than it was prior to the COVID-19 pandemic, due to higher bond yields.A living annuity allows you to manage your investment portfolio choices and choose the income level that you want to receive each year. Your income is not guaranteed and would depend on the performance of your investments.   Therefore, regular monitoring is required to ensure that you don’t run out of money during your lifetime. Unlike guaranteed annuities where all payments usually stop once you pass on, a living annuity provides the advantage of having the balance of your investments paid to your beneficiaries.

Don’t ignore the impact of fees on your retirement savings

A paper by National Treasury titled Charges in South African retirement funds has found that an individual who reduces their retirement savings investment fees from 2.5% of their yearly investment to 0.5% of their yearly investment would receive 60% more money in retirement after 40 years, all else being equal.

In deciding on the best option on what to do with your retirement savings in the event of retrenchment, resignation or retirement, the associated fees for each option should also be considered.

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