Quick cash carries a hefty price

Individuals who have lost their regular income may perceive little choice but to withdraw money from their retirement fund and or other savings vehicles. Brokers should ensure their clients understand the full implications of these choices.

For a person who has just lost his or her source of income, whether a business or a job, and is facing mounting piles of debt and the possible repossession of their assets, the temptation to withdraw money from a retirement fund and or other savings vehicles to either reduce debt or augment income, is quite understandable.

For a number of years, many financial services intermediaries advised clients who found themselves in these situations to withdraw their liquid investments such as unit trusts while leaving endowment policies untouched.

Dipping into an endowment

It has, however, become clear that the cost account of endowment policies is viewed by the insurer as debt and thus carries interest. However, if one was to surrender an endowment policy in a bid to free up cash, although you would not receive your full fund value, it may still prove to be beneficial as the difference is used to cover the debt in the policy; debt the investor wasn't even aware of.

Clients facing loss of income who are considering withdrawing cash from their investments should therefore make sure they know exactly how the loan account in their endowment policy works.

Don't touch retirement savings

For the fortunate few who found a new job after retrenchment or business closure, the best advice is: be sure to transfer your funds to a preservation fund and don't use it! These savings were made for retirement purposes and that need still exists. Furthermore, any monetary withdrawal made in the event of retrenchment will reduce the tax-free quota at retirement, even though it may have been taxed on withdrawal.

Apply packages wisely

Retrenchment packages are not paid for retirement savings but rather to alleviate some of the pain from loss of income. These funds should therefore be used to reduce any possible debt that the client might have. If new employment is found, the premium saved by the reduction of debt should be used to pay off other debt as soon as possible. When all the debt is covered, the full premium should be used towards saving, some for the short and medium-term, and some for retirement purposes.

Throughout this entire process, it is important to ensure that an investment philosophy takes the client's current position and needs into account, while focusing on the purpose of and reason for the investment.