Two-pot warning for South Africans close to retirement

South Africans who withdraw money from their retirement savings under the new two-pot system risk giving up a substantial portion of their income after retirement.

This is according to Actuarial Specialist at Momentum Investo Paul Menge, who said this is especially true for people nearing retirement.  

South Africa’s new two-pot retirement system was implemented on 1 September 2024.

In short, it allows retirement fund members to withdraw a portion of their savings every year before retirement while another portion is kept in a vested ‘pot’.

It is a reform aimed at improving the accessibility and security of South Africans’ retirement savings. Under this system, retirement contributions are split into two “pots”:

• Savings Pot: Accessible before retirement, this portion allows individuals to withdraw a part of their savings under certain conditions, such as emergencies. The amount withdrawn is taxed, ensuring people use the funds responsibly.
• Retirement Pot: This portion remains locked until retirement age, ensuring that a significant portion of savings is preserved for retirement income.

When the system was implemented, thousands of South Africans opted to withdraw from their retirement savings. In mid-October, Bloomberg reported that South African pension funds have paid out R21.4 billion.

The South African Revenue Service said it had received 1.2 million tax-directive applications for withdrawals, of which 1.1 million were approved. 

“During September, the financial industry was reeling from the number of calls and emails to contact centres – some people were desperate to access the retirement money they’re allowed to withdraw,” Menge said.

However, he said the influx of requests for two-pot withdrawals has seemingly tapered off now.

Momentum Investo is a small product house within the larger Momentum group, and Menge said most of their clients contribute an average amount of R 1,200 per month to a retirement annuity. 

He said some members supplement their savings in retirement funds at work, and some work for themselves. 

“We were pleasantly surprised that only around 1% of our clients made retirement savings withdrawals,” he said. 

However, “we’re worried about how many of those who did make withdrawals fell in the age group of 40 to 49 years. Almost 50% of those who withdrew fell into this category.”

“This means they don’t have a lot of time left until they retire. Most of us realise that it is time in the market that earns us the most growth – and that the last couple of years are the ones where we build the most value.” 

This is because the more money you have, the more your growth can compound or “snowball”. 

“Think of it as a ball of dough: The more dough you have, the better the yeast to do its magic while it’s basking in a warm place to double in size,” Menge explained. 

“But, if a naughty child keeps stealing little balls of dough, you’re in trouble.” 

To illustrate this, Menge compared two scenarios of one South African who chose to withdraw money from their savings versus one who did not.

In this scenario, the two people invest in a 25-year retirement annuity of R3,000 per month. They increase their contributions by 10% per year during the savings term, and we assume a 12% growth before fees. 

The result of withdrawing from your savings compared to remaining invested can be seen in the table below.

This scenario shows that the person who opted to withdraw from their savings is giving up a third of their income during retirement. 

“With inflation being the bully it is, eating away at savings, this is not a great idea,” Menge said.

“Fortunately, there is a plan. These are still the early days of access to retirement money. Hopefully, those people who were in desperate need of financial relief have made the withdrawals they needed to.”

He said that people who have been withdrawing from their savings can ask their financial advisers for help. 

Advisers can calculate how much they must save to catch up to where they would have been, taking into account:

• How much they withdrew
• What tax they paid on the withdrawal, i.e., the tax rate they usually pay on their income
• What growth they have missed out on

“We all want to make sure that our retirement is as stress-free as can be one day. It will be great if we can slice a freshly baked bread every day,” he said.