Resist the temptation to dip into long-term savings for short-term needs

According to a recent National Treasury statement, the government may soon allow retirement fund members to take limited pre-retirement withdrawals from their retirement funds. While the intention is to offer members short-term financial relief under specific circumstances, it’s important not to lose sight of the long-term nature of these investments and the generous tax breaks for investing in them.  

An investment in a retirement fund is a long-term commitment. It allows you to amass a substantial chunk of money throughout your working life, resulting in a nest egg that should ideally be accessed only when you need it most — at retirement.  

The taxman recognises the importance of retirement savings and offers savers tax breaks for doing this. Retirement funds are, without a doubt one, of the most tax-efficient ways to build up and manage your long-term savings. 

There are three basic ways the taxman encourages you to save: 

• The contributions you make to your retirement fund are tax deductible, up to certain limits each year.  This means you pay less tax on your monthly earnings, while saving for your retirement.
• The money you accumulate in your retirement fund will grow tax-free over time.  This means the growth on your retirement savings, while in your retirement fund, will be exempt from income tax, capital gains tax and dividends tax. 
• When you retire, a portion of your retirement benefits may be tax free. Benefits taken as a cash lump sum at retirement will be subject to the lump sum tax tables, where the first R500,000 of the cash lump sum is tax free and the balance of the cash lump sum will be taxed at preferential rates. Any annuity you receive will be taxed at your marginal tax rate.

With all the savings retirement fund members accumulate, it’s no wonder that many people, including government legislators, are talking about the possibility of allowing members to dip into these savings to help them resolve financial problems that may exist in the present. 

The government is considering allowing retirement fund members limited access to their retirement benefits before retirement, but only in emergencies or extraordinary circumstances. It’s proposed that members will build up two pots of money in their retirement fund — one for long-term savings and a second allowing members access for short-term financial relief.  

A member who accesses their short-term savings before retirement may, however, be forced to preserve some of the balance of their benefits until retirement, even if that member leaves employment. The design and details of these proposals have not yet been bedded down and we are likely to only see these changes coming into effect next year, at the earliest.

While accessing your retirement benefits early may solve your immediate financial needs, you should avoid the temptation of dipping into your biggest savings pool. Early access undermines the ultimate aim of long-term savings, which is to take advantage of tax breaks and the time value of money to grow your investment until your old age. 

So, before these announcements come into effect, take a moment to consider the significant tax breaks you get on your retirement savings, the importance of your long-term goals, and the serious impact that early access may have on your retirement.

This article does not constitute tax, legal, financial, regulatory, accounting, technical or other advice. The material has been created for information purpose only and does not contain any personal recommendations. While every care has been taken in preparing this material, no member of Liberty gives any representation, warranty or undertaking and accepts no responsibility or liability as to the accuracy, or completeness, of the information presented. Please consult your financial adviser should you require advice of a financial nature and/or intermediary services. 

Liberty Group Ltd is a licensed insurer and an authorised financial services provider (no 2409).

About the author: James Coutinho is senior tax manager at the Liberty Group.

This article was paid for by the Liberty Group.