Allan Gray retirement savings warning

Allan Gray warned South Africans against tapping into their two-pot retirement savings component to splurge on festive season spending. 

The asset manager’s head of assurance, Richard Carter, explained that this would significantly undermine savers’ retirement outcomes. 

“We continue to worry about investors taking out money for short-term needs that aren’t emergencies, undermining their long-term retirement savings goals,” Carter said.

South Africa’s two-pot retirement system, introduced on 1 September, divides all future contributions from retirement fund members into two components – a savings component and a retirement component.

The recent introduction of the two-pot retirement system in South Africa may tempt consumers to withdraw retirement savings to pay for discretionary festive season spending. 

“The aim of the two-pot system is to preserve your retirement investment while allowing access to the savings component once per tax year in case of emergencies,” Carter explained.

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.

Although investors won’t be able to contribute further to this portion, they may be able to access it in certain circumstances, including if they resign, depending on the rules of their retirement fund. 

Carter said that for many investors, especially those who have been investing diligently for several years, keeping a lid on the vested component is even more important than not dipping into the savings component. 

“For example, for a 55-year-old investor who has been contributing to a retirement fund since they were 25 and intends to retire at 65, the vested component (plus growth) could be as much as 90% of the amount available at retirement,” he said.

“For these investors, the most important thing to do is to ensure that the vested component remains invested appropriately and resist the urge to take this money out.” 

Carter explained that using your savings component as an emergency fund makes sense if the alternative would significantly impact your finances. 

“To the extent that you use this one-third for emergencies, you will be eating into your retirement investment, and all else being equal, you will not have enough at retirement.” 

Rather than dipping into your retirement investment to fund your festive season splurge, Carter told savers that discipline should be your first priority. 

“Marketing tricks entice us to spend, but it’s important to protect your future financial well-being.”

Although too late for this festive season, a strategy for the future is to set aside money monthly to account for this expensive time of year. 

Regular contributions over time into a low-risk unit trust, such as a money market or interest fund, will preserve and grow your capital, and you can access it when you need to.

Early withdrawals under the new two-pot system will negatively impact retirement income and have significant tax implications. 

Allan Gray’s retail legal team manager, Jaya Leibowitz, warned that any withdrawal will be included in the individual’s gross income for the tax year. 

This means the amount withdrawn will be taxed at their personal income tax rate and may even bump individuals into a higher tax bracket. 

“It is important to understand that because it is included in gross income, the withdrawal amount could push you into a higher tax bracket,” she warned. 

This aims to discourage individuals from accessing a savings withdrawal benefit when they have other sources of income and don’t need to dip into their retirement fund savings.

“Wherever possible, retirement fund members should avoid accessing their savings withdrawal benefit,” Leibowitz said.

Sanlam’s consulting actuary, Ryan Campbell-Harris, calculated that nearly half of the withdrawal amount can be eaten up by taxes and transaction fees. 

He gave an example of someone who withdraws R10,000 from their retirement fund under the new two-pot system. 

Assuming this individual earns between R370,000 and R512,000 a year and is taxed at a marginal rate of 31%, they will lose nearly half of the withdrawal amount to tax and transaction fees. 

This member will receive only R6,762 of the R10,000 withdrawal. R200 will go to the transaction fee, and the rest will be lost to tax. 

Researchers from the Reserve Bank 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.