Danelle Esterhuizen: Head of Innovation and Design at Sanlam Distribution
When a relationship ends with your employer, your financial contributions end too. However, depending on your specific fund rules, you may be able to leave your built-up pension in your employer’s pension fund, but unfortunately you cannot continue contributing.
Importantly, ensure that you get a letter from your employer stating that you have been retrenched, which should come via your company’s HR department. If you don’t receive this letter from your employer, make sure that you request it from the HR department, as you are legally entitled to it. On that letter it should clearly state that you have been retrenched (not that you resigned or were fired, for example) as well as stipulate your package total – your severance package, leave pay, your provident and/or pension fund totals, etc.
Please consult with a financial planner before you take any action regarding your savings and investments
You could transfer any pension or provident fund benefits, tax-free, into a preservation fund to reap the most benefits. If you take the lump sum from the fund at retrenchment, only the first R500 000 is tax-free, the rest will be taxable.
It’s understandable that under current circumstances, you may need urgent access to money. Times are tough and things are uncertain, but as far as possible, try not to touch these funds. Your leave pay and severance package should be used to pay off as much debt as you can and to keep things running until you find a new job. If you do urgently need money, you can draw R25 000 tax-free from your preservation provident or preservation pension fund, but thereafter you won’t have access to any more funds until you turn 55.
Seek the advice of a registered financial planner to guide you on the best way to transfer your funds.
If you can afford to keep up your monthly contributions after suffering a loss of income, do. If you’re able to, the best way to take advantage of volatile markets is with a recurring contribution product, because with lower average unit prices over a period of time when the market is down, you will be able to buy more units compared to when the market is up. This is referred to as rand-cost averaging. Keep making recurring payments to benefit from rand-cost averaging to really get ahead when things improve again.
If you do pause your contributions, you may need to save more in the future to catch up with the retirement savings needed to provide for the income you need in retirement.
Some of our plans offer a payment holiday or bridging period on qualifying savings plans if you’re experiencing a temporary lack of income; we want to help you retain your plans where possible. Please speak to a financial planner about this option. It’ll be important to set a follow-up date with your financial planner to discuss your evolving financial situations and how to best get you back on track towards your financial plans.
It’s good to remember that your financial plan and policies are there to achieve certain goals, and to protect you or your dependants when unexpected things happen. These considerations remain important, even in challenging economic times. Keep talking to your financial planner, as they’re best placed to help advise on how decisions you make now will impact your overall financial strategy and future.
Another thing worth noting: cancelling risk policies now may cost you more in the long run, as some plans (like life cover, for example) can be more expensive to take out again in the future, when you’re older. Talk to your financial planner before cancelling, to see how best to move forwards.
Cashing in 100% of your pension fund could be the most financially damaging decision you could make. Don’t forget why you have this money saved up in the first place: if you cash in the entire pot, you’re robbing your future self from your retirement. You could also wipe out years of hard saving work. Try to explore all of the sources of finance available to you, and discuss the options with your financial planner, before you make a decision.
Depending on the retirement vehicle, you may also be limited to how much, and at what age, you can access retirement capital. Where withdrawals are available, it’s important to consider that tax that will be paid on these amounts, as well as the impact on any tax-free lump sum you could get when you retire. Your qualified financial planner is best positioned to explore the different sources of finances you can deploy to meet your current and future income needs.
There are also other relief measures which are being made available by the government to help with income constraints related to the COVID-19 pandemic. Talk to your employer or agents at UIF to find out more about these relief measures.
If you’re invested in market-linked portfolios
Over the short term, you’ll probably experience negative returns. But don’t panic: history shows that markets recover over the medium to long term. History has also taught us that, in time, there will be recovery in the financial markets. Try to be patient; it’ll pay off.
If you’re invested in retirement funds
Retirement fund portfolios are spread across various asset classes, such as bonds, property, cash and international assets, to reduce underlying risk. Your retirement savings are also protected (but not guaranteed) by the limitations of exposure to asset classes enforced by Regulation 28 of the Pension Funds Act. This helps by diversifying your portfolio. The most important Regulation 28 asset class limits are as follows:
*As prescribed by the South African Reserve Bank.
If you’re invested in a lifetime investment option, your monies are gradually moved from high-risk portfolios to lower-risk portfolios as from 6 years before your normal retirement date. Lower-risk portfolios have less equity exposure, which reduces the impact of the falling markets.
If you’re invested in a lifetime investment option, your money is gradually moved from high-risk portfolios to lower-risk portfolios 6 years before your normal retirement date. Lower-risk portfolios have less equity exposure, which reduces the impact of the falling markets.
Everyone in your life – from your family to your financial planner – can only support you if they understand your situation and what you’re going through. Just like the thousands of hard-working South Africans suffering from retrenchment right now, losing your income isn’t your fault – it’s the tragic reality of tough economic times.
The sooner you can talk openly about your change in circumstances, the quicker those around you – including your financial planner – can help you formulate a plan to get back on track.
By investing a lump sum or some of your salary each month, you can grow your money over time so that you can retire comfortably. No matter how much you need to or can afford to save, the most important thing is to stay committed to saving.
If you are retrenched or move jobs, you can maintain your retirement plan by moving it into a preservation fund. Resist the temptation to cash in your savings, as it will be very hard to make up for the value you’ll lose.
If you are retiring soon or are already retired, you need to draw a monthly income from your savings to maintain your lifestyle. You also need to manage your retirement savings to ensure it lasts throughout retirement.