The Covid-19 pandemic has underlined how few people save for a rainy day or have an emergency fund, and a significant number of South Africans have resorted to cashing in their retirement savings to make ends meet.
This is according to 10X Investments’ latest retirements report, which is based on the 2021 Brand Atlas Survey findings. Brand Atlas tracks and measures the lifestyles of 15 million economically active South Africans – those living in households with a monthly income of more than R8,000 – through online completion surveys.
The problem of South Africans not proactively anticipating their retirement is steadily getting worse: 50% of people surveyed for the 2021 report said they don’t have a retirement savings plan- last year it was 49% and the year before 46%, the financial services firm said.
The data shows that 60% of South Africans who were given the opportunity to cash in their savings, did so. This should be a last resort and one that many could have avoided if they were more informed on the consequences of doing so, 10X Investments warned.
“There is no doubt that in today’s economic climate, many of those who cash out their savings have no other realistic choice. Even if they are aware of how much they will lose over the longer-term, immediate, pressing concerns, such as hungry children or being handed over to debt collectors, will override worries about their future financial well-being.”
However, the report notes that cashing in retirement funds is not just limited to those struggling to make ends meet, but is increasingly common among corporate fund members. 10X Investments cited data from previous retirement reports showing that the number of corporate fund members who cash out and spend all of their savings despite not having an immediate and pressing need for the money remains high.
What it will cost you
The investment retirement specialist provided an example of two people – James and Khanyi – who contributed R1,000 a month to retirement funds from the age of 25.
At the age of 35, both James and Khanyi change jobs, and James decides to cash in his retirement savings, while Khanyi opts to preserve hers.
“By cashing in his retirement, James pays SARS a tax penalty of R21,420 on his withdrawal. This is equivalent to losing almost two years (21 months) of his monthly contributions to his retirement fund,” 10X Investments said.
The cost of James’ decision is more keenly felt at the retirement of 65, where his savings are worth just over half (R673,000) of Khanyi’s R1.14 million.
The group said a much better option for those people would be to take their savings to their new employer’s fund or ringfence them and the associated tax benefits in a preservation fund.
The loss of the growth of those savings, which compounds over time, is almost always significantly more than the loss of the amount saved.
10X Investments noted that the graph below is based on a 5% pa net real growth rate, after fees and inflation, and quantifies the true cost of an early withdrawal, in the context of a 50-year investment life. The multiplier on a fund withdrawal (or not saving) at age 25 is 11.5x.
“To put it another way, R10,000 withdrawn at age 25 means R115,000 less money in retirement. Or, more practically, someone who withdraws R300,000 at age 35 will have R2.1 million less money in retirement, in today’s money terms, than they could have had.”
A National Treasury proposal, first mooted in August 2021 to allow retirement savers to access a portion of their savings in times of distress, seeks to moderate the impact of early withdrawals by imposing mandatory preservation on the balance.
It is an attempt to help savers balance short and long-term needs, ensuring some provision for retirement, 10X Investments said.
“When changing jobs, retirement savers have the option to preserve their savings, either within their current retirement fund or to transfer tax-free to a new employer’s fund or to a preservation fund or retirement annuity fund. Yet many members cash out their full benefit, unaware that there is the option to take a portion as cash and preserve the remainder, with the opportunity of one more – full or partial – withdrawal before retirement age.
“Many people who intend to use only a small amount of their savings, and who are unaware of these options, take the whole amount.”