Making difficult financial decisions during difficult times
South Africa, and indeed the entire world, is finding itself in an unprecedented situation of having to deal with a pandemic that is causing havoc in all spheres of life where the “new normal” changes on a daily basis. The challenges are not limited to our physical health, but our emotional and financial well-being is also taking severe strain.
With lockdown restrictions being reduced, the economic activity is slowly coming out of hibernation in most industries. But I suspect that there are still many who will not be able to return to work. Some of these individuals will not just temporarily loose part of their income, but may eventually be unemployed in cases where employers are unable to survive this crisis.
As if it is not already difficult enough to make ends meet from one day to the next, one should at same time also consider how this will change your longer-term retirement plans. The question is how can you possibly meet your immediate financial needs while also keeping an eye on retirement planning?
A break in saving towards retirement
The golden rule when it comes to retirement planning to consistently contribute towards your retirement savings throughout your working life and to preserve these savings when changing employment. This continuous accumulation of savings for retirement is the key to securing an adequate income that will sustain you in retirement.
Both the Pension Funds Act and the Income Tax Act define pension funds, provident funds and retirement annuity funds as structures that are established for the main purpose of providing income in retirement. Contributions to these retirement savings vehicles, where it is offered by an employer, are compulsory and government’s intention is further to make preservation of these benefits compulsory when you change employment.
However, compulsory contributions and preservation of benefits is not necessarily a viable option right now. Many companies are experiencing severe cashflow constraints at the moment and a number of them have already reduced their employees’ salaries. Planning for a comfortable retirement, which can be many years away, is probably the furthest thing from your mind when struggling to pay the bills on a reduced salary.
The retirement industry regulator, the FSCA, acknowledged that compulsory contributions towards retirement benefits cannot be afforded by all right now. In response to this crisis the FSCA therefore now allows employers to temporarily suspend retirement fund contributions under specific circumstances.
This will mean that employers can now redirect contributions to pay salaries or to meet other essential cash flow needs. Suspending employees’ own contributions towards a retirement fund will similarly bolster employees’ take-home salaries at a time when it is needed the most.
(The full communication document from the Authority on the suspension of contributions (Communication 10 of 2020) can be found on the FSCA website at www.fsca.co.za/RegulatoryFrameworks/Industry Communication/Retirement Funds.)
When temporary relief is not enough
The temporary relief from retirement fund contributions will unfortunately not be enough to save all companies. Some employers and staff may need to renegotiate their terms of employment on a more permanent basis. This could include substantial restructuring which, in turn, may lead to the permanent termination of existing retirement funds.
There are unfortunately many companies that will just not be able to survive this crisis. The statistics reported in the news of the number of companies that are not expected to be around once all of this is behind us, is downright scary. Where an employer ceases to carry on business or is liquidated, the company’s retirement fund will in all likelihood also need to be liquidated, depending on the rules of the fund and the nature of the company’s termination.
Upon liquidation of a fund, whether voluntary or compulsory, all contributions and benefits will cease and accumulated savings are distributed to members upon conclusion of the liquidation in about 6 to 12 months’ time. Members will be given the choice to take their accumulated savings in cash or to transfer the benefits to be preserved for retirement in another fund.
Keeping the long-term goal in mind
While the suspension of contributions will give welcome relief in the short term, the impact of such a “contribution holiday” on one’s long term retirement goals should be considered. Some additional savings may very well be required when the world returns to better days again.
The option to cash in one’s retirement savings where this will be possible in liquidation may be very tempting during difficult times. However, it might be near impossible to recover any savings that you dip into right now. Using retirement savings to maintain your current lifestyle may just be postponing the hard times to retirement when you will have even fewer options for any sort of recovery.
Making the right choices
The impact of current circumstances on your financial situation can differ vastly from one person to the next. If this lockdown period is a mere social inconvenience to you which is intruding on your holiday plans, then you are one of a small hand full of the very lucky ones. Chances are that your retirement planning has not changed at all.
On the other extreme, COVID-19 might have drastically changed your financial situation. Survival from day-to-day is priority right now and having access to your retirement savings may be the only solution to keep bread on the table. Retirement planning is out the door for individuals who find themselves in this position, for the moment at least, and making ends meet in retirement will be a problem for the future.
If you are in a position somewhere between the above extremes, you need to plan with an open mind and be prepared to make some tough lifestyle decisions. Having access to suspended retirement contributions for immediate financial relief will certainly be a welcome addition to the monthly budget, albeit perhaps a much tighter one. You should hopefully be in a position to make up these lost savings, or absorb the impact thereof, at a later stage.
There are proposals being considered to allow retirement fund members to withdraw a portion of their accrued retirement savings. It may be justified where people need this money to survive, but it will be very difficult to recover any retirement savings that you may use up during these times. It is therefore critical to protect your retirement savings if this is at all possible, even if it does require some drastic cuts to your current household expenses. The retirement savings that you have so diligently built up may be the only means to sustain yourself in retirement.
We are finding ourselves in uncharted territory and the financial hardship that many people experience right now is unlike anything we could have imagined just a few months ago. We hope and trust that all of us will find a way through this and will be able to provide for our loved ones, not only during these days but eventually also in retirement.
And if you are in the fortunate position not to be affected by this global crisis and are able to assist those in need, we hope that you will find it in your heart to do so. Stronger together. Always.