Picture: 123RF/FLYNT
Picture: 123RF/FLYNT

Three months after the lockdown began, hundreds of thousands of employees have still not received the promised Temporary Employer/Employee Relief Scheme (Ters) benefits from the Unemployment Insurance Fund (UIF).

This led a 38-year-old bus driver to resign his job in the hopes of accessing his pension savings to feed his children and pay his rent, the Sowetan reported recently.

He is one of many South Africans whose pension savings are their only plan B. And their only way to access these savings is to resign, risking their future earnings amid dire predictions about job losses over the next few months.

Sadly, the driver's desperate action may take some time to bring him relief as it could take as little as five days or as much as six weeks for the fund to get a directive from the South African Revenue Service and pay out the money.

If the driver's savings exceed R500,000 - or if he has withdrawn before now on retrenchment or resignation - he could also be taxed for accessing his savings early.

The difference this early access will make to the pension he receives later in life will be staggering.

Glacier calculated that if a 45-year-old had saved R1.5m and withdrew it now, he would forfeit R387,000 in tax.

If he and his employer save R2,000 a month for the next 15 years to age 60, he'll probably accumulate about R728,000 on which to live in retirement - none of it tax free.

Had he instead withdrawn just R20,000, preserved the rest in a fund, contributing another R2,000 a month until age 60, he would have R6.7m on which to live off in retirement, with R480,000 being tax free at retirement.

That is the price of an early withdrawal from your retirement savings.

It is very possible the driver was neither aware of this, nor had any choice.

Who failed him?

The UIF Ters scheme has so far put R23bn in the hands of almost 4-million workers who lost all or some of their income as a result of the lockdown.

The system has frustrated employers and employees, and can be criticised for offering too little too late, excluding many informal workers and failing thousands of workers left in the dark about whether their applications are incomplete or whether employers have abused the system.

But it was a response to a crisis for which this social security system was not prepared.

The reaction of the bus driver to its inadequacies was to use his retirement savings as an emergency fund.

But it's not a role for which retirement funds were designed. They cater for those who preserve for many years, and early withdrawals - for whatever reason - attract a tax penalty.

If you are retrenched, you get access to your full pension savings with some tax relief, but it reduces the tax benefit you get at retirement.

To mitigate the financial hardship the lockdown has caused, labour federation Cosatu has asked finance minister Tito Mboweni to allow retirement fund members suffering income loss to withdraw the equivalent of six months' income from their retirement funds.

It suggested the minister use the Disaster Management Act to implement this relief because amending the Pension Funds Act, the Income Tax Act and fund rules would take much too long.

The Association for Savings and Investment SA has worked on a proposal for the Treasury to consider and the former deputy registrar of retirement funds, Rosemary Hunter, has suggested there is a way for funds to grant special relief but the tax implications need addressing.

But four weeks on there has been no feedback.

The US, India, Malaysia and Australia have amended their retirement fund legislation to give members who are out of work, on reduced hours or in sole-trader businesses hit by the pandemic access to their savings.

Tiaan Kotze, CEO at Liberty Corporate, says Australia is allowing members two tax-free withdrawals amounting to about R240,000, India is allowing members to withdraw the lower of 75% of their retirement savings or three months' salary, and Malaysia is allowing members aged under 55 to withdraw about R2,175 a month for 12 months.

The US is allowing members to access amounts up to about R1.9m from their savings. If repaid within three years the withdrawals will be tax free, he says.

Kotze says the retirement industry has discussed allowing banks to offer pension-backed lockdown loans, like those funds offer for home loans.

South Africans living too close to the financial edge have long needed help saving for emergencies and goals like education. The focus on this that the crisis brings will hopefully see some good suggestions made over the past few years implemented.

The disadvantages of raiding your pension savings early are clear. And with markets still down, now is not the best time to be using your savings. Glacier rightly says you shouldn't treat your retirement fund as an ATM. But, as Alexander Forbes argues in its Benefits Barometer, preserving savings for retirement when your present needs - not wants - are great, just isn't workable.

As long as social security is inadequate, retirement funds could do better by the bus driver. Borrowing from your future self, with incentives to repay that loan, is surely a better option than cashing in your savings and giving up your job.