The two-pot floodgates are open

With the new two-pot retirement system now allowing withdrawals, billions of rands are flowing out. While this may seem like a quick fix for financial strain, it could leave many in a worse position in the long run.

This is according to Dumo Mbethe, CEO of Momentum Corporate, who spoke on the Kaya Biz podcast. 

According to Momentum’s latest annual results released on the 27th of September, the number increased to over 150,000 claims with a value of R2.5 billion.

Other asset managers with large exposure to pensions and retirement funds have also seen substantial amounts withdrawn in the first three weeks of the two-pot system.

Old Mutual CEO Iain Williamson said the company has received 125,000 withdrawal requests, for a total of R1.7 billion, during the ten days that their system has been open for applications.

Alexforbes said it has also experienced withdrawals totalling more than R1.5 billion so far.

The high number of withdrawals Momentum and other retirement funds have seen are largely a result of people who need the savings to deal with financial strain or emergencies.

“It’s an illustration of the financial stresses that many in South Africa are facing, and the two-pot system, to a large extent, was meant to address financial emergencies,” Mbethe said. 

“I think that on its own really then makes it quite understandable that we are looking at the sort of significant numbers that we’ve seen over the last few weeks.”

He explained that while Momentum has seen people withdrawing to deal with genuine emergencies, others are likely withdrawing to use the money for wants rather than needs. 

“I also think there’s quite a big element of people simply wanting to withdraw because the money is there and it’s available.”

“And that’s where we do start to get concerned that people are starting to compromise their ability to retire comfortably in the long run, and perhaps for some, the very short term.”

What is even more concerning, though, is the people who are making the withdrawals. 

Mbethe explained that 40% of the withdrawals being made have been from members in the 40-49 year age group. 

“These are individuals who are nearing retirement.” Even though it may still seem distant, a person who is 49, for example, will only have about 11 years left before they retire. 

“So whatever you’re withdrawing today, you will not have sufficient time to make up in terms of years of work and perhaps linked to that year of contributions.”

Momentum has seen similar application trends for people in the 30-39 age group.

Both groups are economically active but have quite a number of personal and family financial responsibilities, which are likely pushing them to withdraw at these high rates. 

“So you can understand why perhaps individuals in those age groups would find themselves under some significant financial pressure.”

However, he cautioned that even in cases where there is a genuine need, individuals should seek financial advice first. 

There are several alternative options available – like pension-backed home loans and access to credit – and withdrawing from your retirement savings should be the last resort. 

Many people are genuinely unaware of the long-term consequences of withdrawing. They’re focused on their current financial pressures and see the money available to them as a quick solution.

“They are looking at a financial pressure scenario they are dealing with right now. They need to be able to provide for tomorrow, and they see that there’s this amount available.”

However, when we explain the tax implications and the impact on their retirement savings, they are generally open to understanding the situation better. 

“In fact, in that particular instance, we’ve also seen quite a number of members who have changed the decision to withdraw once they’ve obtained the right information.”

This is not always the case, though, as some people who are applying are well-informed about the consequences.

They know the tax implications and understand the effects on their retirement journey, but they still choose to withdraw. 

For them, it’s like receiving a bonus or “13th check” at work—they know it will be taxed, but they need the money now and are making a conscious decision to withdraw.

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Mbethe strongly encouraged people to only make these withdrawals in extreme cases, and make use of a budget and a financial plan to avoid doing so. 

Overall, there is optimism that the new system will strengthen the financial position of South Africans, both before and after retirement. 

By placing a cap on the amount that can be withdrawn annually, the system aims to protect retirement savings over the long term. 

“The beauty of this legislation and this system is that there is a two-thirds of every contribution into the retirement fund that is now going to be set aside until retirement.”

“So at least in 10 years’ time, those two-thirds of the amount will be sufficient that you might start to see individuals having at least something decent when they reach retirement age.”

However, Mbethe explained that there is still concern that repeated withdrawals could create a snowball effect, diminishing both immediate financial stability and the potential for a secure retirement.

“From the numbers that we’ve run, if you consistently withdraw a third every year until you retire, unfortunately, you will not be able to achieve a successful retirement outcome by being able to replace a decent amount of your last income on retirement.”