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Two-pot retirement fund warning 

Finance experts have issued warnings to South Africans about withdrawing money from their retirement funds under the new two-pot system, saying it jeopardises investment returns and may encourage bad financial behaviour. 

The imminent rollout of the two-pot retirement system aims to address deficiencies in the country’s retirement framework and deliver better results for South African retirees.

The proposed “two-pot” retirement system wants to balance future-proofing your finances with emergency access to the funds. 

Your contributions are split into a locked “retirement pot” for long-term growth and a “savings pot” for occasional withdrawals in times of need. 

While the retirement pot secures your golden years, the savings pot offers tax-advantaged early access compared to the traditional withdrawal option. 

This reform aims to create better outcomes for retirees by promoting higher levels of savings and by preventing South Africans from withdrawing all of their retirement savings early. 

Finance Minister Enoch Godongwana confirmed in his Budget Speech that the two-pot system is set to be implemented on 1 September 2024 after being pushed back from 1 March 2024. 

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. 

This is feedback from the head of product at Morningstar South Africa, Francis Marais, who said that accessing any part of your savings before retirement will break the compounding process and reduce your future wealth. 

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. 

The head of financial education at Old Mutual, John Manyike, echoed Marais’s concerns by urging South Africans not to get too excited by the new two-pot system. 

“Many South Africans, who are also facing severe financial strain, may be excited about the prospect of some relief through accessing their pensions. However, it’s essential to understand the limitations associated with tapping into their pension funds,” he said.

Manyike said that despite the appearance of these withdrawals being ‘free’, there will still be tax implications and withdrawal fees charged. 

The savings pot should primarily be seen as a reservoir for emergencies. The temptation of short-term financial alleviation can lure consumers into frequent withdrawals, Manyike warned.

Such actions can drastically erode the capital necessary to generate an income during retirement.

This issue is exacerbated if the monthly contributions made to the fund, including the retirement and savings pots, are insufficient to meet the desired retirement income.

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