Warning for South Africans earning under R20,000 a month

South Africans earning up to R20,000 a month are making up the majority of two-pot savings withdrawals as they scramble to make ends meet, putting them at risk of being unable to retire comfortably.

Zareena Camroodien, the Departmental Head of Fund Governance and Trustee Conduct at the Financial Sector Conduct Authority (FSCA), explained this on the Kaya Biz podcast.

Recently, the FSCA released a report outlining the trends in two-pot withdrawals from retirement funds.

The report revealed that nearly 2 million withdrawals were made, with three-quarters of these made by members aged 31 to 51. Notably, over 40% of the withdrawals came from members in their 30s.

In contrast, less than 15% of withdrawals were made by members over 50, indicating that this age group is more focused on preserving their retirement savings.

Additionally, over 65% of withdrawals originated from members with annual pensionable salaries ranging between R60,000 and RR240,000.

One in four individuals who made withdrawals had a monthly income between R15,000 and R20,000, while a similar proportion fell into the R5,000 to R10,000 monthly income bracket.

According to feedback from fun administrators, these withdrawals are mostly used to service household expenses. This includes housing and car expenses, short-term debt, and school fees. 

With this data in mind, Camroodien said that most people appear to be using their two-pot withdrawals responsibly. 

While some people use their savings to pay for things like holiday expenses or entertainment, they are in the minority – making up only 1%. 

Predominantly, she said, “it’s for your real pressing needs that I think many of us as South Africans face.”

The age group that made the most withdrawals, aged 31-51, often has significant responsibilities such as servicing their bonds, managing card repayments, caring for dependents, and covering school fees.

“I think those are all the things that really push you to withdraw,” Camroodien added.

This additional liquidity, especially for those in difficult financial positions, is precisely the problem that the two-pot savings system and its withdrawal component aimed to address. 

However, Camroodien cautioned that any withdrawal made would impact your income replacement ratio when you retire. 

Considering that only about 6% of South Africans can afford to retire comfortably, these savings must be given the maximum amount of time to grow and accumulate interest. 

Financial experts, including those at the FSCA, recommend not withdrawing from your two-pot savings account unless it is an absolute emergency. 

Not only do you lose out on the compound interest you would have earned on your retirement savings, but you also have to pay SARS at your marginal tax rate whenever you make an early withdrawal.

This tax is specifically meant to discourage people from taking out this money, and in some cases, people end up paying most or all of your withdrawal towards SARS. 

For this reason, it is advised that you ensure all of your obligations towards SARS have been settled before attempting to make any withdrawals. 

On top of this, some providers are charging members quite a hefty amount for any withdrawals made. 

The FSCA’s recent survey revealed that the average fee for withdrawing R30,000 is over R350, although there is a significant variation among providers.

While most funds applied a flat fee of between R200 and R350, one administrator charged as much as R600. 

Currently, the FSCA is still looking into these fees to determine their reasonableness.

Regardless of if these charges are fair, though, they are still an extra, avoidable cost for these fund members. 

“So, unless you absolutely need it in the case of an emergency, you ought not to touch that because we’re all aiming to retire comfortably,” Camroodien said.