Re-assessing your financial priorities in tough times remains key, says Old Mutual
Rising inflation, interest rate hikes and food costs all take their toll on the pockets of South African consumers. There are some consumers so focused on living well that they are spending tomorrow’s salary today.
People in this situation find it difficult to resist the temptation to cash in on their long-term savings. Saving for the long term seems less important to them than rather tightening their belts to see them through the tough times.
“Consumers should not consider cashing in on their retirement savings as an option to access money when faced with difficult economic decisions,” says Michael Harper, Managing Director of Retail Affluent at Old Mutual.
He says consumers need to make informed choices. “Get all the facts. When people’s financial situations change it is important that they seek the advice of a financial adviser or financial planner before making any rash moves, especially when dealing with financial pressures,” recommends Harper.
“It’s all about priorities,” he says. “Some people are failing to consider the impact of their living for today lifestyle in terms of their future financial well-being. These folk are either living beyond their means or are spending the money on luxury items that are not necessities.
“When times are tougher, it is vital that we re-assess our priorities. Importantly, consumers should not lose sight of vital aspects such as making provision for retirement; healthcare needs and risk protection for life style changing events. Financial advisers or financial planners will help to structure an action plan to create a healthy financial portfolio that will enable you to retire comfortably whilst still living in your means today,” emphasizes Harper.
It is a fact that South Africa does not have a strong savings culture. SA households’ debt to disposable income ratio is at a record high of 78,2%, while debt servicing costs to income are just above 12% having doubled over the past two years. It is therefore not surprising that millions of South Africans find themselves in the debt trap. The average South African saves less than 2% of his or her income.
The reality is that many South Africans who appear to be doing well today may find they are living on little more than the government pension at retirement.
According to Harper cashing in on long-term savings should be the very last resort.
If you terminate a policy or withdraw from a retirement fund early you will lose any associated disability and life cover. Disinvestment charges will also reduce the amount you receive. Also remember that disinvesting from your savings policy will have a further negative impact in the sense that you will miss out on the power of compound interest.
For example, for every R1000 that you disinvest from you policy today you will lose out on
R 2594 in 10 years or R 6727 in 20 years time at 10% p.a. net investment return
R 3106 in 10 years or R 9648 in 20 years time at 12% p.a. net investment return
R 4046 in 10 years or R 16367 in 20 years time at 15% p.a. net investment return
If you need money urgently, rather investigate other options relating to your savings and investments -
·If you cannot afford to increase your monthly contributions, you may be able to opt out of automatic premium increases. But remember, removing the premium update facility permanently can result in a massive erosion of the purchasing power of your savings.
·You can apply for a loan against your policy. However, there may be costs involved. Typically money is needed to register the loan and to cover the monthly administration fee. Interest on the loan will accumulate at commercial rates. (This facility is not normally available from retirement funds.)
·You can cede your policy (but not a retirement fund) as security to cover a loan from your bank. If you go this route you should try to ensure that you get the best possible interest rate from the lender. The debt will have to be serviced for as long as the capital remains unpaid.
·You may be able to make a policy or retirement annuity fund paid-up, which means you do not make any further premium payments. Depending on the circumstances you may be able to reinstate your investment at a later stage when you can afford to do so.
·You may be able to make a partial withdrawal from a policy (but not a retirement fund). This would help you to restore the value of your savings once you are in a better financial situation. However, there are likely to be once-off administration costs involved, and the value of your policy will be reduced – including a reduction in the amount of associated life and disability cover, if any.
These are tough alternatives, especially if taken without advice from a financial adviser or financial planner.
“At Old Mutual we believe that sound advice is essential to financial well-being. We encourage South Africans to seek the advice of advisers or financial planners who can help them put together a holistic financial plan that meet their needs today and in the future,” emphasises Harper.
If you are considering withdrawing from a retirement fund, like a pension fund or retirement annuity fund, you will need to know what the rules of the fund allow.
”All of us need to give serious consideration to the importance of matters like setting up household budgets, settling debt, changing existing wills or drafting new wills, and identifying and addressing other needs such as life and disability cover which provide essential financial protection for ourselves and our dependants,” concludes Harper.
