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


National lockdown continues to impact many organizations in South Africa. As a result, some employers have downsized their workforce to help ease the financial strain on their businesses.

Earlier this year, StatsSA announced that South Africa’s unemployment rate is now 32.5%, the highest on record since the current measure was put in place in 2008. This is an impact significant over South Africa’s total labor force, which was just over 22 million. in December 2020, as reported by StatsSA.

If you, as an employee and member of a pension fund, are affected by a layoff, resignation from your current job, or approaching retirement, it is important to understand and consider all of the options that may arise. are available to you before making financial decisions, to ensure that you can still best achieve your retirement goals in today’s economy.

What are your options if you resign or are fired?

If you resign or are made redundant, you will usually have the option of keeping your accumulated retirement savings in your current retirement fund, transferring them to a preservation fund, or withdrawing them in cash.

While it can be worth having extra cash in times of uncertainty, it’s important to understand the consequences of withdrawing 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 One of the consequences is that the cash withdrawn from your retirement savings will be subject to income tax, reducing the amount you actually receive in your bank account. However, this is not the case for cash withdrawals of R25,000 or less, as the single tax-free withdrawal threshold would apply.

In making the decision to withdraw money from retirement savings before retirement, the short-term benefit of having money on hand today must be weighed against the impact at long-term less effective savings towards your long-term retirement goal in the future.

Alternative options are available that allow you to preserve your retirement savings. You can either keep your savings invested in the retirement fund to which you currently belong or invest your accumulated retirement savings in another preservation fund. In these cases, there is no tax impact on the retirement savings being preserved, meaning you will likely have more money in retirement compared to a scenario of withdrawing your retirement savings. Employees who choose to keep their retirement savings still have the option of withdrawing their retained money prior to retirement.

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

The impact on retirement prospects when withdrawing all retirement savings accumulated before retirement is greater for older people than for younger people, as they have less time in their working life to save. in preparation for retirement.

What are your options if you retire?

The investments of many individuals have been affected by the effect of COVID-19 on underlying assets and financial markets around 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 prospects.

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

What is a guaranteed annuity? What is a life annuity?
This annuity provides you with income for the duration of your remaining life as well as a choice of how your income would increase in the years to come. For example, you can choose a level annuity where your income remains the same throughout your retirement. Alternatively, you can choose an increasing annuity where your increases can be a fixed percentage, linked to the CPI, or determined by the performance of an investment portfolio. The starting income of a guaranteed annuity is currently higher than it was before the COVID-19 pandemic, due to higher bond yields. A life annuity allows you to manage your investment portfolio choices and choose the level of income you want to receive each year. Your income is not guaranteed and would depend on the return on your investments. Therefore, regular follow-up is necessary to ensure that you will not run out of money during your lifetime. Unlike guaranteed annuities where all payments generally stop after you die, a life annuity offers the advantage of having the balance of your investments paid out to your beneficiaries.

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

A document from the National Treasury entitled Fees in South African pension funds found that a person who reduces their retirement savings investment costs from 2.5% of their annual investment to 0.5% of their annual investment will receive 60% more money in retirement after 40 years, all other things being equal.

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

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