The real cost of withdrawing from your retirement fund 

Withdrawing money from your retirement fund under the two-pot system will have a greater negative impact on your finances than using a credit card for the same amount and paying it off over five years. 

This is according to calculations from Momentum Savings, as part of its efforts to understand the real impact of using money from retirement funds for immediate expenses that are not emergencies. 

The two-pot system has been in effect since 1 September, with South Africans withdrawing billions from their savings ‘pots’. 

Since 1 September, all retirement fund contributions have been split into two ‘pots’: 

• 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.

While many expect the new system to largely benefit savers and asset managers, the full impact of withdrawing from your retirement savings is difficult to calculate. 

The head of business transformation at Momentum Savings, Therèse Havenga, got a team of actuaries to compare the impact of withdrawing to using a credit card for the same amount.  

Havenga outlined three scenarios for comparison – using money from the two-pot savings component, using a credit card, or saving up for an expense beforehand. 

For the first scenario, Havenga assumes that the individual would retire in five years and has R42,000 saved up with monthly contributions of R3,000. 

To include tax implications, the individual earns R30,000 per month and has a 26% tax rate. This tax will be charged alongside a R200 withdrawal fee. 

With these assumptions, a R30,000 withdrawal would have a full opportunity cost of R74,370 as that is the amount it would have grown to in five years’ time with a 12% annual return. 

To make up for this cost, an individual would have to save an additional R917 per month – resulting in them effectively “paying back” R55,020 to cover the R30,000 withdrawal. 

If the individual had borrowed R30,000 on a credit card with a 21.75% interest rate, they would have to repay R825 per month for the next five years. 

This would translate into a total cost of R49,500 to pay back the initial R30,000. 

Saving up beforehand to cover the expense is by far the most cost-effective way as it would only require an individual to save R370 per month for five years at a 12% return. 

The individual’s total contribution would have been only R22,200 to cover a R30,000 expense in five year’s time. 

The comparison between the costs of using a two-pot withdrawal, a credit card, or saving up is shown in the table below. .