Rising inflation, higher interest rates, petrol price increases and escalating food costs make for the perfect consumer storm - and have left many of us short of cash. This has seen South Africans cashing in savings and policies so they have enough money to get by.
This article considers the possible consequences of forgoing part, or all, of your investments, and whether there are alternatives you can consider.
Tip: Are you struggling to juggle your debts? If so, consider debt consolidation.
What to consider before cashing in
There are many types of savings products, notes Cherise Erasmus, a certified financial planning professional at Crue Invest - from discretionary investments such as unit trusts to compulsory investments such as retirement annuities. Common to all of them, she warns, are the tax implications of cashing them in.
When it comes to low-risk investments, chances are that you are invested in interest-bearing instruments. If you have an investment that’s performing well in the markets, you could be liable for capital gains tax – and cashing in your capital at the wrong time can lead to loss, Erasmus cautions.
Kobus Kleyn, a certified financial planner at Kainos Wealth, recommends speaking to a financial professional who will take into account factors such as tax, penalties, growth, fees, and interest, and help you make a clearer decision about potential losses if you cash in.
If you need cash to travel to a funeral, get out of debt, or cushion yourself financially if retrenched, it’s better to access funds in the money market, fixed deposit accounts, or endowments. You could also consider borrowing from your access bond if you have one, as interest rates are usually lower than those of short-term loans.
“If you really have no alternative, weigh up what it would cost to take out a loan against the cost of cashing in your savings – but be careful of over-indebtedness,” warns Wouter de Witt, co-founder of Gravitas Tax.
The impact on retirement savings
When it comes to compulsory retirement savings, the law is strict about when you can or can’t withdraw, since your savings are meant to provide you with an income in your senior years.
“Withdrawing these funds could affect you for the rest of your life, so get unbiased advice from an independent, qualified financial professional before taking this course of action,” says Erasmus.
Traci Porter, a financial adviser at Efficient Wealth, says you’ll not only pay tax if you withdraw these funds, you’ll also lose valuable compound interest on your investment.
You’re allowed to withdraw R25,000 tax-free before you retire, after which you’re taxed on a sliding scale. This takes into account all previous withdrawals – even the small amounts taken when moving jobs. Compare this with being able to take the first R500,000 tax-free after retirement.
De Witt notes that sacrificing compound interest can make a huge difference to your savings.
“If you have R100,000 invested for ten years at an interest rate of 10%, you’d have R270,000. If you withdraw that now, you’re losing R170,000 worth of interest over next ten years,” he explains.
The psychological impact
Many people under the age of 55 years withdraw their pensions out of real financial need, such as health issues or a loss of income. However, withdrawing cash to satisfy a want that could be put off until tomorrow is a potential concern.
Similarly, cashing in to start a business in a precarious economy, or using funds to buy a house when interest rates are low, may be unwise.
“It’s important to understand how we manage ourselves and our emotions,” says psychologist Quinton Williams. “Before cashing in, ask yourself three key questions. Are you aware of the implications of your behaviour? Are you acting impulsively, or have you thought through your decision? Do you understand your motivation?”
Williams says you should consider how much long-term relief spending your retirement funds will offer, and whether there is an alternative that would preserve your retirement funds.
“Keep your long-term goals in view and make sure your actions are aligned with your core values,” he suggests.
Tip: It’s never too late to start investing for retirement. Find out more here.