Coronation retirement fund warning
While the two-pot retirement system enables South Africans to access a portion of their savings early, this comes with significant long-term financial consequences.
Calculations by Coronation show that R1 withdrawn from an individual’s retirement savings at 35 years old will have a nominal cost of R30 at retirement and reduce the capital they have in retirement by around R6 in real terms.
Rael Bloom, a product development actuary at Coronation, outlined these consequences in a research note and explained why compulsory preservation is so important in South Africa.
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 goes into a retirement component, which must remain untouched until retirement.
- The remaining one-third is directed into a savings component, which allows for one withdrawal per tax year before retirement.
After years of regulatory reforms, this change has finally brought compulsory preservation over the line – an essential step toward improving retirement outcomes for millions of South Africans, Bloom said.
Bloom explained that many have focused on how much money has been taken out and the ability of asset managers to handle the influx of claims.
However, the real focus should be on encouraging South Africans to stay invested and explaining the severe cost of early withdrawal.
While the two-pot system enables individuals to access funds early, these withdrawals come with significant long-term financial consequences that could drastically reduce a member’s standard of living in retirement.
The immediate consequence is that withdrawals from the savings pot are taxed at the individual’s marginal tax rate, meaning a portion of each withdrawal is lost to taxation, Bloom explained.
Those who wait until retirement to withdraw benefit from preferential lump sum tax tables. By withdrawing early, they effectively forfeit this valuable tax advantage.
More importantly, individuals disrupt the powerful effects of long-term compounding when they withdraw early. Compounding enables retirement savings to grow exponentially over time as returns generate further returns.
For instance, for every R1 withdrawn from a retirement fund 30 years before retirement, the future value of a member’s savings is reduced by around R6 in real terms due to the opportunity cost of foregoing compounded growth.
Even over shorter periods, the impact is still significant – withdrawals made just 10 years before retirement could result in an opportunity cost of R2 (in real terms) for every R1 withdrawn.
This is a powerful reminder that early withdrawals deplete the current balance and can ultimately jeopardise long-term financial security.

Bloom said one of the greatest advantages of the two-pot system is that it offers flexibility without the immediate pressure to make withdrawals.
The savings pot remains available indefinitely, allowing members to keep their funds invested and continue benefiting from growth over time.
This ensures that those can access their savings only when truly necessary, without sacrificing potential long-term returns.
Those who are able to keep their savings invested until retirement will enjoy a substantially better standard of living.
The compulsory preservation of two-thirds of retirement savings is a major step forward and will greatly improve retirement outcomes for most South Africans.
However, Bloom said it’s vital to emphasise that individuals can substantially enhance their future standard of living by avoiding or limiting early withdrawals.
Keeping funds invested allows members to fully harness the benefits of compound growth alongside tax advantages over the long term.
The real value of the system – and the financial security it can provide – depends on how well members understand the long-term consequences of early withdrawals.
Bloom said Coronation expects withdrawals to slow down to a steady state after the initial rush, leading to more South Africans remaining invested until maturity.
This should translate into far better retirement outcomes for individuals and, in turn, ensure they rely less on family members and the state for support after their working careers.
Keeping funds invested allows individuals to fully harness the benefits of compound growth alongside tax advantages over the long term.
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