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RETIREMENT SAVINGS

The Covid-19 effect on your pension or provident fund means less cash in the pot

The Covid-19 effect on your pension or provident fund means less cash in the pot
(Photo: Adobe Stock)

Reduced contributions, increased withdrawals and an inclination to postpone retirement savings. These are the top three outcomes of the past two years spent under the shadow of Covid-19, a downward-spiralling economy and lockdowns, which forced many businesses to shut up shop.

The Sanlam Umbrella Fund reports that participating employers affected by the lockdown were able to implement “absence with consent” provisions, which meant that no contributions were payable during this period other than the risk premiums and the related costs. “Those with reduced salaries and work hours were able to reduce their pensionable salaries accordingly. A few hundred participating employers applied for a temporary suspension of contributions on account of being in financial distress,” says Kobus Hanekom, the principal officer of the Sanlam Umbrella Fund.

The fund’s 2021 Trustee Report shows that about 50% of enquiries and concerns from members in the past year were about withdrawal benefits. These included instances where the withdrawal documentation was not submitted timeously or was incomplete, members questioned the amount of their benefit and the withholding of their benefits on the employer’s instruction.

These statistics aligned with the Pension Funds Adjudicator’s annual report for 2021/21, in which withdrawal benefits were the highest category of complaints at 52.93%. Non-payment of retirement fund contributions came in second at 23.87%.

In a concerning twist, the fourth 10X Retirement Reality Report shows that the economic hardship of the past year has taken its toll on the retirement savings landscape. Some 64% of those surveyed (up from 56% last year and 55% the year before) said they simply could not afford to save because there was no money left at the end of the month.

However, in light of thousands of retrenchments in South Africa since the start of 2020, this makes sense. You can’t save for retirement when you have little to no funds to meet your basic expenses.

According to Stats SA, 49.2% of South Africa’s total adult population of 35.1 million lives below the upper-bound poverty line. The country’s unemployment rate is officially the highest globally, sitting at 44.4% in the second quarter of this year. According to the South African Property Owners’ Association, an already desperate situation was exacerbated by the riots in July, which cost South Africa about R50-billion in lost output and placed at least 150,000 jobs at risk.

This year, 70% of retired respondents in the 10X Retirement Reality Report said they retired when they wanted to, while 29% claim they were forced to retire before they wanted to, and 2% said they had to work for longer than planned. Chris Eddy, head of investments at 10X, says that if you postpone retirement savings and save for only 30 years rather than 40, this translates to as much as 50% less income in retirement.

When you change jobs, you have the option to preserve your savings, either within the current company’s retirement fund or by transferring it tax-free to your new employer’s retirement fund or 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,” says Eddy.

He warns that the repercussions for your final pot of retirement savings are serious.  

David Gluckman, chairperson of the Sanlam Umbrella Fund, notes that the pandemic has also given new emphasis to the wider social security and retirement fund reform discussions. A Green Paper on social security reform in South Africa was published in August 2021. There are ongoing discussions about allowing you early access to your retirement savings, possibly linked to amended preservation rules. Currently, you are not allowed to access your retirement savings within provident or pension funds unless you leave your job or retire.

However, the government has proposed a more structured two-bucket system that will enable the restructuring of future contributions. One bucket is to be preserved until retirement, and the second will allow for pre-retirement access during emergencies or extraordinary circumstances.

According to the National Treasury, although this proposal covers pension and provident funds, a harmonised approach on withdrawals is also being considered for retirement annuities. However, changes to the law are only expected to take effect in 2021 at the earliest, and some provisions may take even longer.

Andrew Davison, chair of the Investments Committee of the Actuarial Society of South Africa, equates accessing your retirement savings before retirement to stepping into quicksand. “It seems like no big deal, but it’s almost impossible to regain solid financial footing once your retirement savings have been reduced.

“So, while this decision might rescue you from a difficult financial position now if you don’t refill the ‘hole’ in your finances at some point between now and retirement, then it will most likely sink you later in life when your age, and possibly your health, might leave you with few options,” he says. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest stockist, please click here.

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"Information pertaining to Covid-19, vaccines, how to control the spread of the virus and potential treatments is ever-changing. Under the South African Disaster Management Act Regulation 11(5)(c) it is prohibited to publish information through any medium with the intention to deceive people on government measures to address COVID-19. We are therefore disabling the comment section on this article in order to protect both the commenting member and ourselves from potential liability. Should you have additional information that you think we should know, please email [email protected]"

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