As the world begins the process of gradually putting the main health and financial challenges of Covid-19 behind it, many people are contemplating how they can get their retirement savings plans back on track.
According to Samukelo Zwane, Head of Product Development at FNB Wealth and Investments, those retirement savings recovery plans need to include one very important lesson that Covid-19 has reminded us of – which is the value of staying invested for the long term.
“At the height of the pandemic, many people found themselves in a difficult financial position, and some took the ill-advised step of leaving their jobs simply to access their retirement savings,” Zwane explains, “however, now that the pandemic has eased, and our markets are back on track, most of these individuals find themselves in a very difficult position, because it is unlikely that they will ever be able to build up those savings that they used up.
“If they want to build up their pension to their previous levels, they would either have to save more on a monthly basis or they would have to work longer.
“In addition, by using up their pension they have lost out on the benefit of compound returns-making earnings on your earnings. And that means they can probably no longer look forward to the quality retirement they might have enjoyed had they stayed invested.”
Zwane emphasises that the experience of these people who cashed in their retirement savings is a vital lesson about the importance of preservation for every person who is a member of a retirement fund. And he stresses that it doesn’t just apply during times of crisis.
“Members of employee-provided retirement funds have the opportunity to access their saved-up retirement benefit whenever they leave their employer, whether that is due to resigning to change jobs, retrenchment or dismissal, or any other reason,” Zwane points out, “and the temptation to cash in some, or all, of those retirement savings can be great at these times.”
But he highlights several compelling reasons why you should do whatever you can to keep your retirement savings invested until you reach retirement age rather than withdrawing them early – and the most important of these is the capitalizing on the value of time through compounding.
In investment terms, compounding is essentially making earnings on your earnings. In other words, the growth you achieve on your investment capital gets reinvested, and then you keep growing that extra money again and again, over time.
According to Zwane, the positive growth effect of compounding is multiplied the longer you leave your money invested. But if you withdraw your capital before retirement, you lose out on all that time-based growth you would have enjoyed.
Of course, avoiding missing out on the full benefits of compounding is not the only reason why you should preserve your retirement savings when you leave your employer or change jobs.
Zwane also points to other negative impacts that can decimate your retirement savings value if you fail to preserve, notably the impact of tax.
“As soon as you withdraw money from your retirement fund, you generate a tax event,” he explains, “which means that SARS is going to take a big chunk of your money by taxing the amount that you withdraw.
“So, not only are you losing out on the value you would have built up if you left your money invested, but you are also going to experience a tax leakage-paying unnecessary tax.”
Zwane says the best way to turn this potential lose-lose scenario into a win-win situation is by moving your retirement benefit into a preservation fund when you leave your employer.
“Switching your retirement benefit to a preservation fund incurs no tax, which means the full amount of your savings will be invested and continue to grow for you,” he explains, “and while you can’t make any additional contributions into a preservation fund, you can make changes to the underlying investments to maximise growth, just like you could in your retirement fund.”
Another benefit of using a preservation fund is the ability it gives you to move your investment into another pension fund at a later date, without paying tax, or even switch it into a retirement annuity if you want to do that.
And because you pay no tax on this type of transfer, using a preservation fund to hold, and grow, your retirement value in the short- or long term makes excellent investment sense.
And Zwane points out that if you use one of FNB’s preservation funds to store and grow your retirement savings, you also benefit from access to up-to-the-minute information about your investment, which makes monitoring and managing it easy and convenient.
“It’s easy to make the switch into an FNB Preservation Fund, you simply speak with your Financial adviser who will kick-off the process of preserving your retirement savings,” he says, “and then, once you are invested in one of our preservation funds, you can check up on how it’s doing as often as you like, simply by logging in to the FNB app.”
“If you ask any successful investor what the key is to growing an investment, the chances are very good they will say it’s time,” Zwane says, “and when you choose to place your retirement savings in a preservation fund rather than spending it, you expose it to all the growth potential that time offers, which means it keeps working towards one of the most important goals we all have – a happy and financially secure retirement.”