LAURA DU PREEZ: How dipping into your savings can blow your retirement goals
More than two-thirds of South African retirement fund members do not preserve their retirement savings when they change jobs, and the average person changes jobs five to seven times in their lifetime.
But not preserving your savings can have a devastating effect, as the case of Buyisile*, a 52-year-old engineer from Cape Town, shows.
Buyisile had more than 30 years of service with an employer and had saved R3.6-million in his pension fund when he resigned last year to pursue his dream of owning his own engineering company.
He followed the advice of his financial planner Buyi Nodada from Old Mutual Wealth to preserve his savings in a preservation fund. Members of preservation funds are allowed one withdrawal before the age of 55. So when cash flow became tight, Buyisile withdrew R 1.5-million from the fund.
These were the implications Nodada said:
Liable for tax
Buyisile became liable for R387 000 in tax, which was deducted from the R1.5-million, so he received a little over R1.1-million.
The fees Buyisile pays on his preservation fund are calculated as a percentage of the assets under management. The less you have invested, the higher the percentage charged.
As a result of his withdrawal, Buyisile's fees increased by almost half a percentage point, from 2.52% of his savings to 3%.
The higher fees eat away at the investment return each year and reduce the compounding effect, resulting in the difference in the amount available at retirement being much greater than the R1.5-million, Nodada said.
At a retirement age of 65, Buyisile's savings would have grown to a projected R14-million at a return of 12% a year, but now he will have only a projected R7.6-million.
Income in retirement
If Buyisile had not made a withdrawal, his savings on retirement would have given an income in today's rands of R30 533 a month, escalating by 5% a year. As a result of the withdrawal his income will be only R17 846.
Capital in retirement
When Buyisile reaches retirement, he will be entitled to take a third of his savings as a lump sum. But any withdrawals will be taxed at the highest tax bracket of 36% as the R1.5-million withdrawal he made before retirement means he no longer qualifies for a R500 000 tax-free withdrawal and the lower rates of taxation that apply to lump-sum withdrawals at retirement. However, the R387 000 that he has paid in tax will be deducted from his tax liability at retirement.
Buyisile told his adviser he would need an income in retirement equivalent to R25 000 a month in today's money and that he would like to buy a holiday home in Muizenberg, worth R 1.47-million in today's terms.
Before the withdrawal, Buyisile still needed to save R542 234, which translated to R3 898 a month in contributions (with a 6% escalation) to achieve his retirement goals.
After the withdrawal, however, he needed an additional R295 1332, which translates into R2 1217 a month in contributions (with a 6% escalation) to achieve his goals.
That is almost six times the amount required before retirement and this can be attributed to the higher fees, the lower investment returns and the tax that he will pay on the withdrawal, Nodada said.
* Not his real name