Coronation retirement fund warning 

Coronation has warned South Africans against withdrawing funds from their savings pot as part of the new two-pot retirement system, as this would significantly reduce the amount of money they have for life after work and crush their standard of living. 

Head of Personal Investments at Coronation, Pieter Koekemoer, issued this warning ahead of the implementation of the new system in September this year. 

Questions have been raised as to whether the government will meet this deadline as significant legislative and regulatory changes must be made before asset managers can prepare for the changes. 

The two-pot reform formalises this ‘split’ of your retirement plan into three separate pots in retirement fund accounts:

• A vested pot (representing most of your RA fund value at the time of implementation).
• A retirement lump sum pot.
• A retirement income pot.

The most significant change under the new system is that you will be allowed one annual early withdrawal from your retirement lump sum pot. 

The value in your savings pot will initially be seeded by R30,000, or 10% of your fund value at implementation (whichever is the lowest), transferred from your vested pot.

 One-third of your future contributions (from 1 September) will also be allocated to this savings pot.

The table below shows the allocation of vested savings and future contributions from 1 September 2024.

Koekemoer clarified that withdrawing funds from the lump sum pot is not an obligation but merely an option and that it would be far better for investors to keep all their savings invested until maturity. 

“Early access is costly and can seriously reduce your standard of living in retirement. You are effectively borrowing money from your future self, “ he said.

Withdrawing early effectively means that you are borrowing from your future self over a fixed term at your expected rate of return on your investment. 

To illustrate this, Koekemore suggested you assume you are 35 years old and intend to retire at age 65. 

Any R1 accessed through an early withdrawal may cost you R30 in lost retirement benefits at the time of retirement. 

In other words, by resisting the urge to access your savings early, your money could have multiplied by a factor of 30 over the three decades until retirement. 

While the numbers become less dramatic when you shorten the period between early access and retirement, they remain retirement-defining.

Even for an individual making an early withdrawal ten years before their intended retirement date, it would still cost them R3 in lost retirement benefits for every R1 taken out early.

A single decade of missed compounding means that you have effectively halved the purchasing power of the money taken out as part of your early withdrawal, he explained. 

The bottom line is that to avoid a significantly reduced standard of living in retirement, you must resist the temptation to make regular early withdrawals to fund discretionary spending today.

By not accessing your retirement savings early, you allow the powerful effect of compound growth to work to your full advantage.