On the back of Covid-19, and the widespread financial difficulties that many people experienced as a result of two years of lockdowns, some South African employees opted to resign from their jobs in order to access their retirement savings.
According to Elize Giese, CEO of Employee Benefits at FNB, there are many reasons why nobody should be taking this course of action.
“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 ,” she explains, “but 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 says that the reason for this is 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.
But Giese points to an even bigger problem revealed by this desire by some South Africans to resign in order 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 materialized,” says Giese, “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 explains 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 investment together under the banner of ‘savings’, a misperception has been created that all these savings vehicles are more or less the same.
And the result is that many people don’t realise that each type of savings account has a unique purpose, and requires a different mindset in order to deliver on that purpose.
Creating a culture of successful saving requires us to unlearn these misconceptions about saving, and relearn the correct way of approaching our savings behaviours, which means that comprehensive education is needed, particularly regarding the differences between short-term saving, long-term saving, retirement investment and other forms of investment.
Giese says the main purpose of this detailed level of savings education should be to create a clear understanding of how to combine the various types of savings mechanisms for maximum positive impact on people’s lives.
“It is only through understanding these differences that people will begin to realise that while it is acceptable to dip into a short-term or emergency savings account to fund immediate financial needs, the same doesn’t hold true for long-term savings and even less so for your retirement savings because those long-term savings and investment vehicles are almost always linked to a big goal that you want to achieve later in life – so plundering the savings you have accumulated in them, essentially robs you of that goal.”
Of course, while this understanding of 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.
She does, however, urge anyone in this situation to exhaust every other possible option before resigning in order 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 important 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.
“Employers have direct lines of communication with their employees and are best positioned to help them understand why appropriate savings behaviours are so important,” she says, “so it is vital that financial institutions and employers team up to educate people on the different ways to save, and how to combine these approaches for optimum outcomes.”