Tens of thousands of workers who might face retrenchment this year should preserve their retirement savings - rather than eyeing it as an easy source of cash to live off while they look for another job.
Seelan Gobalsamy, managing director of Old Mutual Corporate, says while cashing in retirement fund assets might seem like a good option in the short-term, long-term implications could be disastrous.
He says with equity markets having fallen dramatically in the last few months, and thousands of job cuts experienced in various sectors, it is more important for the retrenched to preserve their retirement savings.
"This is the worst possible time to cash in retirement savings. Members who take their benefits in cash, risk locking into the dramatic investment losses of the last few months," he says.
Gobalsamy says by transferring their benefit into a retirement annuity or preservation fund with a similar investment strategy, the retrenched give themselves the opportunity to participate in future investment market recoveries.
A preservation fund may be a pension preservation fund or a provident preservation fund depending on the transferring fund. They are designed to accommodate the transfer of cash withdrawals, on a tax-exempt basis, so that the full amount of the capital can be preserved on behalf of the resigning-fund member until normal or early retirement, or until the monies are repatriated through means of premature withdrawal, disability or death.
"We understand that people who have lost their jobs need cash to survive, but we strongly encourage them to explore other avenues before looking at their retirement fund assets.
"Cashing in your retirement fund assets might seem like a good option in the short-term, but the long-term implications could be disastrous as you will almost certainly be left without sufficient income at retirement," he says.
Studies show that fewer than 6 percent of South Africans can afford to retire comfortably. This is partly due to people taking their retirement fund assets in cash when changing jobs.
Recent research by Old Mutual savings and wealth management division shows that more than two thirds of members resigning from their jobs before normal retirement age take their retirement savings in cash, rather than leaving the funds where they are or transferring them to other funds where they can continue to grow.
Gobalsamy advises members to engage with a financial adviser on the tax implications of exiting their retirement funds. He says it is the responsibility of retirement fund trustees to provide members with pre-retirement counselling or financial advice to encourage them to keep their retirement fund savings invested for as long as possible.
While 76percent of all funds interviewed provide pre-retirement counselling or financial advice, the study also showed that 50percent offer the advice only one year before retirement and only 2percent offer regular annual input.