Retirement fund warning for South Africa

Within the first two weeks of the new two-pot retirement system, South Africans have withdrawn billions from their retirement funds. 

While this provides immediate financial relief for individuals, it can negatively impact their retirement outcomes and handicap long-term economic growth by reducing the pool of capital able to fund investment in South Africa.

Momentum Group, one of the country’s largest providers of retirement products, said it had received 112,449 withdrawal applications in the first two weeks of the new system. 

South Africa’s new retirement system allows individuals to withdraw a portion of their savings once every tax year, with a minimum withdrawal amount of R2,000. 

This withdrawal is taxed at the members’ marginal tax rate, so a significant portion of the money goes straight to SARS. The asset manager may also levy additional administrative fees per withdrawal. 

Momentum revealed that R1.7 billion had already been withdrawn from the retirement funds it manages. So far, it has paid 81% of withdrawal applications. 

SARS’ data from the first week indicates that over R4 billion has been withdrawn from the savings components of the two-pot system. 

Another large asset manager, Alexforbes, paid out R1.5 billion worth of withdrawals in the first week of the new system. It said around R270 million of the amount withdrawn had been earmarked for taxes. 

Prior to the implementation of the two-pot system, Alexforbes predicted a total of up to R100 billion could be withdrawn from retirement funds before the end of 2024. 

However, most estimates hovered around R50 billion being withdrawn, with around R10 billion of that going to tax—significantly boosting government revenue. 

This should boost economic activity in South Africa and drive growth. Stanlib predicts the impact on GDP to be 0.2% in 2024 and 0.2% in 2025. 

Research from the Reserve Bank shows that the benefit may be even more significant and help bring down the government’s debt-to-GDP ratio. 

Its research also shows the government could collect an additional R41 billion in personal income tax in the fourth quarter of 2024, with billions more in VAT and corporate income tax from increased spending. 

Chantal Marx, head of investment research at FNB Wealth and Investments, said this new system, combined with interest rate cuts, will boost consumer confidence in the coming months. 

This is expected to be positive for domestic retailers, particularly those focused on discretionary items such as clothing and furniture. 

Some benefits could also accrue to the banks, as savers may utilise their withdrawals to pay down debt, improving asset quality and driving higher transaction activity.

Thus, the new retirement system appears to be a net benefit for the economy and the government’s ailing finances. 

However, Momentum said there were some concerning trends picked up in the flurry of withdrawals.

The insurer said the early engagement with the system shows that many South Africans are under significant financial pressure and are willing to sustain worse outcomes in retirement in exchange for immediate relief. 

One key trend observed since the two-pot launch is the age distribution of applicants. Initially, most requests came from the 40-to-49-year-old age group, which made up almost 40% of applications. 

“It is worrying that individuals who are closer to retirement are withdrawing from the savings pot as they may not have enough time to make up for the shortfall,” CEO of Momentum Corporate Dumo Mbethe said. 

However, as the days passed, applications from the 30-to-39-year age group increased relative to the other age groups – closely reflecting the demographics of national contributors to retirement.

Income distribution data further sheds light on the state of financial wellbeing among applicants. By 13 September, close to 60% of applicants indicated that they were from low-income groups, earning too little to pay personal income tax. 

The rich have not been spared from financial pressure, with 10% of applications being made by individuals with a taxable income of R500,000 and more per year.

While these withdrawals may provide immediate financial relief to South Africans and boost the local economy, the two-pot system does have the potential to have significant negative effects in the long term. 

Stanlib senior economist Ndivhuho Netshitenzhe said the increase in household consumption expenditure would likely be import-intensive, limiting the upside benefit to overall GDP. 

Increased spending in the next year will be offset by declining savings and a smaller pool of capital to fund investments in South Africa. 

South Africa already has one of the lowest savings rates in the world, with household savings reaching -0.9% as a share of disposable income in the first quarter of 2024. 

The two-pot system has the potential to make this even worse as South Africans increasingly tap long-term savings for short-term spending. 

Domestic savings is a more stable source of funding for fixed investment, and fixed investment is crucial for sustainable economic growth. 

A growing retirement system can ease this constraint over time, but it is unclear if the new system will be able to do so as it is highly dependent on individual behaviour. 

Hopefully, expectations are correct that the magnitude of annual net outflows will dwindle over time, settling at levels lower than the current annual outflows, Netshitenzhe said.  

“Unfortunately, international experience shows that if these types of reforms are not well designed and implemented, the boost to economic activity tends to be short-lived and results in a decline in pension savings over the long term.” 

“All this occurs without alleviating the financial pressure on consumers by reducing their debt or enabling them to build a buffer against higher costs.”

South Africa’s dismal savings rate is shown in the graph below.