2020 has delivered a shock to the personal balance sheets of many South Africans. For many people, it’s no longer “business as usual” with a full salary paid predictably on the 25th of the month.
While there is no doubt that this period has been incredibly disruptive, many have used some of the savings they have generated by not driving or shopping to pay down debt and improve their financial security.
Many are not so lucky.
If you are in a situation where you cannot generate an income and there really is no other option, you might be eyeing your investments as a source of cash to help you fund your day to day expenses. While having cash on hand may give you temporary emotional and psychological relief and security, it’s often difficult to understand the rules or impact of withdrawing from any investments you have. Many of these rules that limit withdrawals are based in regulations.
Whilst we wrote this article to help you understand the rules and impacts of withdrawing, we really must stress that this should be the very last option that you want to take. Withdrawing early from your investments could make it more difficult to achieve your financial objectives.
Although it’s also relatively easy to withdraw from your tax-free saving account, there are some long-term consequences. Tax-Free Savings Accounts are actually about wealth creation, and they really only start working after 10 to 15 years because the compound growth means that you should generate significant wealth and they will save you a fortune in tax. The problem is that you are only allowed to put in R500 000 over your lifetime, or R36 000 per year until you reach R500 000. The moment you add money to a Tax-Free Savings Account you reduce the lifetime allowance – limiting your future wealth creation. Needs must prevail if you are in financial difficulty of course!
Endowments (such as our own Fixed OUTcome Endowment) are great, tax-efficient investment vehicles that require you to invest for at least 5 years. They are really not suitable for early withdrawals, you could be penalized by some providers (not us) and by law you are only allowed to make one full or partial withdrawal in the first 5 years.
You may also consider tapping into your share portfolio or unit trusts as a source of easy short-term cash. Just know that if you are selling because you are worried about poor performance, then you could turn your paper losses into real ones. The challenge that 2020 has presented is that markets – including the JSE – have proven to be incredibly volatile. You could have sold your share portfolio in March 2020 - as concerns around COVID-19 were growing – only to have missed out on 30 to 50% recovery in the next 2 months.
Apart from high transaction fees, regularly trying to sell shares or unit trusts might create tax implications depending on when you purchased the units or shares as well as the price you paid for them.
You may be eyeing your longer term investments including your retirement annuity (RA) or preservation funds but the main purpose behind these vehicles is to provide for you in retirement. You cannot withdraw from a RA before the age of 55 unless you are permanently disabled, get divorced or formally emigrate.
It might even be tempting to resign to cash in your pension or provident fund but before you do this, there are two things to realise. You are going to be very heavily taxed if you withdraw from your pension if you are not retiring. Secondly, if you plan to resign and then rejoin your old firm, some companies make you wait a minimum of 6 months before you can rejoin.
For those who can remember back to the 2007/ 2008 Global Financial Crisis (GFC), the world had a very similar feel to it. The world remembers images of US bankers walking out of places like Lehman Brothers as the banking sector collapsed – it felt like the end of the world. Yet history has shown that the period from 2008 – 2018 was arguably the single biggest wealth generation period of all time. Businesses were “priced for failure” in 2008 but those who had access to cash knew that they would be able to buy high-quality assets when everybody else was selling.
OUTvest is an authorized financial services provider