FSCA warns about South Africa’s new retirement system

The Financial Sector Conduct Authority (FSCA) is concerned that the country’s new two-pot retirement system will make many South Africans think they have to access their retirement funds before retiring.

This is according to FSCA commissioner Unathi Kamlana, who said this is a very important change affecting members of retirement funds in South Africa. 

South Africa’s new two-pot retirement system will kick in from 1 September 2024. This reform allows pre-retirement access to a portion of one’s retirement assets. 

From September 2024, contributions to retirement funds will be split – one-third will go into a “savings pot”, and two-thirds will go into a “retirement pot”.

Retirement fund members will be able to withdraw amounts from the savings component before retirement, while the retirement component will remain protected.

South Africans can withdraw money from their savings component once per year, with a minimum withdrawal of R2,000.

However, Kamlana said it is very important for South Africans to understand that while they will be able to access their retirement savings before retirement, they do not have to.

“The message that dominates is that they will be able to access and therefore everyone must access – it’s not automatic. You access the funds only because there’s a particular need,” he said.

“It reduces what is available there for retirement, and that information is important to empower retirement fund members.”

He explained that each retirement fund will pass rules which explain under what circumstances you qualify to access.

Kamlana is not the only person with concerns about the effects of this new system.

Morningstar South Africa’s head of product, Francis Marais, recently warned that accessing any part of your savings before retirement will break the compounding process and reduce your future wealth. 

While the new system aims to promote long-term retirement savings by limiting early withdrawals to a portion of the total savings, it will negatively impact long-term returns on retirement savings. 

He urged South Africans only to access their funds under exceptional circumstances.

Marais added that the new two-pot system may also encourage bad financial habits through an overreliance on retirement fund withdrawals to fund one’s current lifestyle. 

“The availability of the ‘savings pot’ creates a behavioural bias for the savings pot to be used as a traditional savings account and the belief that these funds can be used regularly. This should be avoided as much as possible.” 

The short-term gain of an instant withdrawal could have material long-term wealth-creation implications, especially for younger savers.