Employees who make one or more withdrawals from their retirement funds will have significantly less when they retire than those who don't. As such, understanding what constitutes a good reason to make a withdrawal is a question that every South African should ask.
While in an ideal world, never accessing your retirement savings in the Fund will be the best choice, in the real-world life happens. As a young person relying on a phone for employment, getting a new phone when one is lost could constitute an emergency. As a parent, paying school fees might fit the bill. Older people might need emergency funds to cover unexpected medical or hospital fees.
That said, accessing your retirement savings in the Fund for entertainment, clothes, groceries, holidays or other frivolous expenditures is to be avoided at all costs. Even for serious financial emergencies, like paying for a funeral, it is better and cheaper to make alternative provisions like buying funeral cover.
Allowing individuals to access a portion of their retirement savings each tax year provides a social relief mechanism for people in real crises to access emergency funds without incurring punitive interest rates, resorting to loan sharks or having to quit their jobs to access their retirement savings. The fact that people can now access some of their retirement savings for emergencies might also take the grudge out of contributing to employer sponsored retirement Funds. The shift may even increase contributions as people realise they can access their funds in times of need.
However, it is important that people experiencing a crisis consider other avenues of funding. Those with access to short-term credit or with disposable assets could consider these before resorting to their retirement savings.
Finally, while weighing whether their financial emergency warrants dipping into the savings component, everyone should consider that those who contribute more and leave their contributions for longer stand to gain from the favourable tax position available, and the greater investment returns. Finally, there is a significant tax benefit for those who will only withdraw at retirement.