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Financially desperate employees “resign” to get their retirement savings

27 September 2021 Momentum Corporate

Momentum Corporate’s multi-employer umbrella fund, FundsAtWork, is receiving requests from participating employers to allow members to resign “artificially” to get access to their retirement savings. Employers then reinstate the employee once they’ve obtained access to their savings. This trend is not unique to FundsAtWork and very likely to be evident across the industry.

The trend reflects the financial vulnerability of many employed South Africans. To make matters worse, many employees are unlikely to receive salary increases, let alone inflationary-related increases, as many businesses struggle to bounce back from the pandemic. Households are becoming more desperate and those family members who are still employed are under pressure to support family members who have lost their jobs and are struggling.

Nashalin Portrag, Head of FundsAtWork at Momentum Corporate, says these “artificial resignations” are not legal. “Allowing access to retirement savings withdrawal benefits through artificial resignation could have serious implications for the retirement funds involved, the participating employer and the member, as SARS views this type of transaction a serious violation of the Income Tax Act.

Recent conversations between National Treasury, business and unions to give retirement fund members limited access to a portion of their retirement savings may have made employees more aware of their retirement savings. However, even if the proposals get the greenlight at the Medium Term Budget Policy Statement in early November, the earliest any changes would become effective is during the course of 2022.

In the meantime, it seems desperate, financially vulnerable employed South Africans are turning to illegal means to get access to their retirement savings.

Should SARS suspect the exit from employment was formally structured as a legitimate resignation while the real intention was deliberately disguised to allow the employee early access to their retirement savings withdrawal benefit, they will investigate further and if they find this is in the case, they could revoke the income approval of the retirement fund.

This would mean, among other things, contributions to the retirement fund will no longer be tax-deductible and investments and their growth would be taxed, which would impact significantly on the financial viability of the retirement fund.

To prevent this, the employee’s fund membership would need to be fully reinstated, as if the artificial resignation never occurred. This means the member will have to repay the withdrawal benefit paid to them in full, which will result in further financial hardship for the employee.”

Portrag concludes, “While we understand how financially vulnerable and desperate employees are, we urge all employers and employees to not succumb to the illegal act of “artificial resignations” to access retirement savings.

Rather, we strongly encouraged to help employees become aware of legitimate sources of help they can turn to if financially vulnerable. For example, our FundsAtWork umbrella fund offers all members access to financial coaching that can help members manage their finances more effectively. All our members also have access to an employee assistance programme that offers debt counselling to help them get on top of their debt and deal with the emotional impact of financial pressure, at no additional cost.

Although retirement funds are not a short-term solution, they do have a critical role to play in supporting employers and their employees with the financial pressures created by the current economic situation in our nation.”

Quick Polls

QUESTION

There are countless articles written about South Africa’s poor retirement outcomes. Which of the following would you single out as the biggest contributor to local savers not accumulating enough to buy an adequate and sustainable pension?

ANSWER

Lack of personal accountability
Poor participation in formal retirement funds
Reluctance to seek financial advice early on
SA’s high unemployment rate
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