In a financial climate where job changes and retrenchments are prevalent, South Africans are being advised to exercise caution before dipping into their pension savings. Asavela Gwala, an Investment Consultant and group RA Consultant at 10X Investment, emphasizes the importance of preserving retirement funds, citing the detrimental effects of premature withdrawals on individuals’ ability to retire comfortably.
Gwala acknowledges the allure of accessing pension funds, particularly for those facing retrenchment or transitioning between jobs. With retrenchment packages often falling short and employment prospects uncertain in a country grappling with high unemployment rates, the temptation to tap into pension savings can be substantial. However, Gwala cautions against this practice, warning that such withdrawals can severely impede individuals’ retirement goals by eroding the power of compound interest.
According to Gwala, the timing of investments plays a pivotal role in retirement planning, with early and consistent contributions being more impactful than the amount invested. He underscores the significance of compound interest in wealth accumulation, stressing that every withdrawal from a pension scheme sets individuals further adrift from achieving financial security in retirement.
The 10X Retirement Reality Report paints a sobering picture of South Africa’s saving habits, revealing that a mere 6% of the population is on track to retire comfortably. Gwala emphasizes that each withdrawal from pension savings widens the gap between those poised for a secure retirement and the majority facing financial insecurity in their later years.
To mitigate the adverse effects of cashing out pension savings, Gwala suggests considering preservation funds as an alternative. Preservation funds offer individuals the opportunity to retain their retirement savings when leaving employment, facilitating a seamless transfer of funds to a new administrator through a Section 14 transfer.
One of the primary advantages of preservation funds is their tax efficiency, as withdrawals from these funds do not incur tax implications. The government’s incentivization of preservation funds underscores the importance of maintaining retirement savings continuity, even in the face of job transitions or dismissals.
However, it’s essential to recognize that opting for a preservation fund does not entitle individuals to direct pension benefits from subsequent employment into the same fund. Instead, contributions would need to be made to the new employer’s pension scheme or a separate retirement product if no company scheme is available.
Gwala underscores the importance of establishing a preservation fund early on, highlighting its role in curbing the temptation to withdraw pension funds impulsively. Given the volatility of South Africa’s economy and the prevalence of retrenchments, having a preservation fund in place serves as a prudent safeguard against financial instability during career transitions.
In conclusion, Gwala urges South Africans to prioritize the preservation of their pension savings, viewing them as a long-term investment in financial security. By resisting the urge to withdraw funds prematurely and opting for preservation vehicles like preservation funds, individuals can safeguard their retirement prospects amidst the uncertainties of the job market. As the adage goes, it’s not just about how much one invests for retirement, but how wisely and diligently one preserves those investments over time.
