Thinking of raiding your retirement savings? Think small and think twice

Laura du Preez | 20 September 2021

Laura du Preez has been writing about personal finance topics for more than 20 years, including eight years as personal finance editor for two leading media houses. 

If you are in a tight financial spot and hoping that you may get access to your retirement savings, be aware that access may be limited, and damaging to your future income.

National Treasury is currently drafting a proposal to give you access to your retirement savings, if you need it.

The proposal, still to be drafted and approved, will only apply to a limited portion of your savings.

And even this limited withdrawal from your retirement fund could have the effect of “stepping into financial quick sand”.

Treasury’s two-bucket plan

Ismail Momoniat, Treasury’s head of tax and financial sector policy, says Treasury hopes to release a bill for comment before the Medium Term Budget in early November.

Briefing parliament’s Standing Committee on Finance in August, he said the bill would propose splitting your retirement fund contributions between two buckets - one for your long-term retirement savings and the other for funds you could access within three or five years of contributing.

Momoniat said probably 75% to 90% of what you contribute would be for retirement savings and you would not be able to withdraw “even one cent” before retirement.

The remaining 10 to 25% of your contributions would accumulate in the second bucket tax free and could be withdrawn for emergencies, Momoniat said.

Currently, you can only withdraw your retirement savings from an employer-sponsored pension or provident fund when you resign from your job.

Momoniat said Treasury will propose that these changes to the pension and tax law be timed with the introduction of automatic enrolment of any one in formal employment, even contract workers earning irregular incomes, as a member of a retirement fund.

Rosemary Lightbody, senior policy advisor at the Association for Savings and Investment South Africa (ASISA), says introducing this “two-bucket system” would not be an overnight process and would involve extensive system changes for retirement fund administrators.

She expects Treasury’s proposal will only apply to contributions you make after the law is changed. Whatever you have saved until then, however, is likely to remain accessible to you on resignation or retrenchment.  

Basil Maseko, National Treasury's Director for Savings told the Financial Planning Institute’s recent Retirement and Investment Workshop, that tax free savings accounts, not your retirement savings, were intended for rainy days.

However, the Covid-19 pandemic made it clear people had not saved for a rainy day, but they had made compulsory retirement savings and wanted to access these.

Treasury is considering allowing those who can prove they have lost a job or suffered a pay cut to have a once-off access to a portion of their savings, Maseko said. 

He said if access is granted, fund members would only be able to withdraw a small amount and the two-bucket system would also limit how much and how many times you can withdraw, as "we do not want to turn funds into ATMS".

Borrowing against savings

A proposal to allow retirement funds to grant short-term loans or guarantees for loans to retirement fund members for any purpose - and not only to buy or build a home - has also been presented to parliament.

The Democratic Alliance’s Dion George introduced this proposed amendment to the Pension Funds Act as a private member’s bill.

George’s bill has drawn some criticism and parliament’s finance committee still needs to decide whether the bill is “desirable”.

Should the bill proceed, George is likely to propose that only up to 30% of what you have saved can be used as security for a loan.

If approved, banks and retirement funds will then need to decide if they want to lend you money for short term loans using your retirement savings as security. If any do, the National Credit Act requires that loans only be granted if you can afford the repayments.

Lightbody told parliament that only 1.4% of employer-sponsored retirement fund members are using pension-backed home loans, as most members cannot afford the repayments.

She also warned that allowing guaranteed short-term loans would remove the protection your retirement savings currently enjoy from being attached to settle outstanding debts.

In addition, if your retirement savings are used to repay a loan on which you have defaulted, this could have tax implications, Momoniat told parliament.

Financial quicksand

If parliament decides to give you access to your retirement savings, the decision to do so should not be taken lightly, Andrew Davison, chair of the Investments Committee of the Actuarial Society of South Africa, warns.

“Whatever you take from your retirement savings now is likely to cause a shortfall in your retirement,” he says.

Like stepping into quicksand, withdrawing from your fund “seems like no big deal but it’s almost impossible to regain solid financial footing once your retirement savings have been reduced”, Davison says.

Your retirement savings might rescue you from a difficult financial position now, but you will need to “refill the ‘hole’” in your savings before retirement or “it will most likely sink you later in life when your age, and possibly your health, might leave you with few options” for finding additional income, he says.

As most retirement fund members have not saved enough for retirement, it is not ideal to let them withdraw some of the money, Maseko told the FPI workshop. “When you start your savings over again at a later age, they are not as effective as savings made early and preserved,” he said referring to the effect of compounding interest.  

Lightbody told parliament that 60% of members have less than R50 000 saved in their retirement funds.

Davison says it takes dedication, discipline and patience to save enough to maintain your standard of living in retirement.

“Sadly, only a few South Africans get it right. For the rest, it means hard decisions about lowering standards of living, relying on family for financial support or queuing in the SASSA line for the meagre older person’s grant.”

Once finalised and implemented, probably only sometime next year, the “two-bucket system” will require South Africans to learn to save for emergencies and not just retirement, Davison says.

“Retirement is not the only reason to save. … Savings build resilience to enable people to withstand life’s knocks. In terms of knocks it doesn’t get much more brutal than the Covid-19 pandemic, which has left many people’s finances exposed,” he says.