Old Mutual retirement fund warning

South Africans should not withdraw prematurely from their retirement savings, even under the new two-pot retirement system, as this will significantly compromise their quality of life after their working career. 

This is feedback from Old Mutual Wealth investment strategist Izak Odendaal, who outlined some key reasons South Africans should not tap into their savings pot to make ends meet. 

The two-pot retirement system will be implemented on 1 September, resulting in all subsequent contributions being split in two. 

• Two-thirds of every contribution goes into a retirement component. 

The assets in this component cannot be accessed before retirement. At maturity, these must be used to purchase a retirement income product, such as a living annuity or guaranteed life annuity.

• One-third of every contribution goes into a savings component. 

As contributions to a retirement fund, the assets in this component should also remain invested until retirement to provide you with income. 

However, this component also provides the option to make one withdrawal (of R2,000 or more) per tax year before retirement if necessary. 

This access is designed to help you in case of emergencies. You also have the option to access these assets as a cash lump sum at retirement. 

There will also be a third pot (the vested pot) that will contain members’ existing retirement savings as of the end of August 2024. The rules will be the same as under the current retirement system. 

In addition, 10% of the retirement savings at the end of August 2024 (capped at R30,000) will be allocated to the savings pot, making it available for immediate withdrawal.

Odendaal said the retirement pot will end the widespread practice of people cashing in their retirement savings whenever they change jobs.  

In fact, many people change jobs just to access their retirement funds. This ‘leakage’ not only leaves individuals without sufficient retirement capital when they reach old age but also means the overall pool of South African retirement assets is smaller than it should be.

Just because you can doesn’t mean you should

Odendaal urged South Africans not to tap their savings pot for early withdrawals even though it is allowed under the two-pot system. 

“It cannot be stressed enough that early withdrawals from retirement funds should be avoided unless absolutely necessary,” he said. 

“The biggest friend any investor has is the time since time facilitates compound growth. Early withdrawals from a retirement fund rob that money of the time to grow.” 

For example, even at a relatively modest growth rate of 4% per year, R30,000 will more than double to R65,733 over 20 years. 

At a 6% annual growth rate, it will more than triple to R96,214, and at 10%, it will grow to R201,825.

Therefore, taking R30,000 out of your retirement savings today does not mean your future self will be R30,000 poorer. It means in future, you will be poorer by R65,000, R96,000 or R200,000 two decades from now.

It gets worse because early withdrawals are taxed at your marginal rate, whereas growth inside a retirement fund is tax-free.

Nonetheless, estimates from the government and various financial institutions suggest that somewhere between R50 billion and R100 billion will be withdrawn in the first month or two after the two-pot system takes effect. 

This will largely be a one-off event, as future withdrawals will be based on one-third of new contributions from September onwards and will, therefore, be spread out over time.

Many asset managers have been concerned about these withdrawals potentially affecting their revenue and profit, as fewer assets under management will translate into smaller fees collected. 

However, Odendaal said withdrawals will gradually decline into a steady state that will be relatively predictable and the forced savings from the retirement component will ultimately benefit savers and asset managers.