South Africans set for R79 billion pension bonanza – with a warning

When the two-pot retirement system is implemented on 1 September, South Africans’ disposable income will be boosted by between R31 billion and R79 billion. 

Last month, President Cyril Ramaphosa signed the Pension Funds Amendment Act into law, completing the most significant change to South Africa’s retirement system since 1994. 

The Act will create a new two-pot retirement system that gives members early access to some of their savings. 

The new legislation mandates that all future contributions to retirement funds be divided into two sections –

• Two-thirds of each contribution will go into a retirement component, which must remain untouched until retirement.
• The remaining one-third will be directed into a savings component, which allows for one withdrawal per tax year before retirement.

Additionally, a separate ‘pot’ will be created for individuals with existing retirement funds to retain the value of all contributions made before the new system’s start date of 1 September.

While the savings component is designed to be accessed as a lump sum upon retirement, members can withdraw up to 100% of their savings component once per year before retirement. The minimum withdrawal amount is currently set at R2,000.

Asset managers expect a flood of outflows once the system is implemented. South Africans are coming under immense financial pressure, and the chance to tap retirement savings offers potential relief. 

This is set to significantly boost the country’s economy in the short term, with Reserve Bank researchers estimating an additional 0.3% of GDP growth due to the new system. 

The researchers expect South Africans to withdraw between R31 billion and R79 billion from their retirement savings in the fourth quarter of 2024. 

This will also bolster the government’s finances through additional tax revenue, lowering its debt-to-GDP ratio by 0.5% in the current financial year and 1% in 2025/2026. 

Projections for withdrawal amounts have varied significantly, with asset managers agreeing that withdrawals will be significant but to different degrees. 

For example, Alexforbes estimated last month that the retirement industry will experience outflows of around 1% to 2%. 

The retirement industry in South Africa currently has around R5 trillion in assets, resulting in an expected outflow of around R50 billion to R100 billion. 

This has led to some concerns from asset managers as to whether their systems will be able to handle the sheer volume of outflows and how it will impact their revenue and profitability. 

While the Reserve Bank’s researchers expect the billions in withdrawals to boost the local economy, they also warned that this will negatively impact the outcomes for South Africans at retirement. 

Early withdrawals, even under the two-pot system, will be heavily taxed and interrupt the compounding process that builds most of the wealth needed for retirement. 

Allan Gray’s head of assurance, Richard Carter, urged South Africans not to view the savings pot of their retirement funds as a slush fund. 

He said this would severely impact their financial outcomes in retirement and prevent many from retiring comfortably. 

While the new legislation does offer some flexibility by enabling access to cash from the savings component, this should only be used in emergencies. 

“We are gearing up for the changes we need to make and will be able to service those clients who want to access a portion of their retirement savings, as per the new laws,” he said.

“However, for anyone uncertain about what to do next, in most cases, you don’t need to do anything.”

The new system should not change how investors think about or invest their retirement savings and should not affect long-term retirement savings goals.

“Guard against viewing your savings component as a slush fund for consumption; depleting it annually equates to using up one-third of your retirement investment,” Carter said. 

“Not electing to withdraw, but rather choosing to stay the course for the long term, will result in better retirement outcomes.”