Nedbank retirement warning

Since the introduction of South Africa’s new two-pot retirement system, many South Africans have rushed to make early withdrawals – primarily to pay off debt – but Nedbank warned that this could significantly reduce retirement savings in the long term.

The two-pot retirement system came into effect in South Africa on 1 September 2024, and by the end of October 2024, SARS confirmed it had received over 1.2 million tax directive applications for retirement fund withdrawals.

Approximately 1.1 million of these were approved, which amounted to almost R22 billion in withdrawal savings.

“Many financial professionals speculated that most people withdrawing money from retirement savings early would use it to fund a large expense, like a deposit on a house or a new car,” Nedbank said.

“More than a few analysts voiced the opinion that South African consumers would go on a spending spree. But the reality is somewhat different.”

A JustMoney consumer survey of more than 6,000 respondents revealed that 79% of them intended to use the funds to pay off debt.

This finding is somewhat at odds with the SARB’s statement regarding the R51 billion expected to be withdrawn from retirement savings in 2024, which predicted that a larger portion was going to consumption than to debt repayments.

“Whether or not the JustMoney statistics reflect those of the broader population, the sheer volume of withdrawals shows the serious financial pressure that South Africans are under.”

“The findings were backed up by pension fund managers at the coalface of the financial decisions about people’s pension savings.”

Momentum processed over 150,000 withdrawal claims, amounting to R2.5 billion. In the first 10 days after launching its application system, Old Mutual received 125,000 withdrawal requests, which totalled R1.7 billion.

Additionally, Alexforbes saw withdrawals exceeding R1.5 billion within the first two weeks of implementing the new system.

Nedbank said the picture for household debt relief is somewhat gloomy, although it does provide context for why people may choose to withdraw their pension savings.

“That approach is entirely justified – and the national economic outlook suggests that you should continue to sit tight for at least the next year or so, taking on as little extra debt as possible.”

“In fact, it would be wise to open more savings or investment accounts for any extra income over the next couple of years.”

“Although the two-pot system can be a lifeline in an emergency, early withdrawals from retirement investments can seriously reduce the amount you’ll have saved by the time you retire.”

The bank advised that those considering a withdrawal should explore other strategies to reduce debt before dipping into their retirement savings pot.

Some experts have noted that taking out a short-term loan is preferable to taking out retirement savings since an early withdrawal means that the effects of compound interest on your savings would be lost in the process.

Overall, it is clear that South Africans need broad-scale economic changes to relieve their debt burden in the future.

According to Nedbank, the Medium-Term Budget Policy Statement (MTBPS) focused on three key economic indicators that need to move in a positive direction to give consumers more debt relief.

The first of these indicators is GDP. Godongwana expects GDP growth to rise to 1.4% for the 2025 financial year, 1.7% for 2026, and 1.9% for 2027.

“But for this financial year to the end of February 2025, he reduced the expected GDP growth to 1.1% – down from an estimated but very modest 1.3% growth projected in the February 2024 Budget,” the bank said.

“GDP growth should be at around the same level as population growth to maintain economic stability, and SA’s population grows at 1.5% per year.”

“From an economic perspective, this means we are still going backwards in terms of wealth generated per person.”

The next key economic indicator was tax income, Nedbank said.

“National tax receipts for the period of the MTBPS were much lower than expected, at almost R23 billion less than February 2024 estimates in the annual budget.”

“Corporate tax collections had gone up, but all other forms of taxation, including personal income tax and VAT, were short of expectations.”

“The MTBPS also estimated that lower income levels, and therefore lower tax revenues, are expected to continue for the next two years.”

Government debt was the final key indicator, with Godongwana’s MTBPS making it clear that levels of government debt are too high.

“Debt will approach R6 trillion in the 2025/26 financial year – servicing the costs of this debt will cost R1 billion a day. The MTBPS estimated that South Africa will improve this debt picture much more slowly than anticipated.”

“The high levels of public debt are directly linked to the seeming inability of the national economy to grow, despite other positives such as lower inflation.”

“Some of the debt issues are caused by the inability of provincial and national departments to ensure that municipalities pay what they owe, particularly to utility providers.”

Nedbank noted that the government’s wide-ranging efforts to partner with the private sector to foster large-scale job creation are looking quite positive.