South Africa

Nedbank retirement warning

Within two months of implementing South Africa’s new two-pot retirement system, over 1.2 million withdrawals, totalling nearly R22 billion, were made. Experts warn of significant tax losses and long-term impacts on retirement savings.

Nedbank explained the vast scope of early withdrawals made under the country’s new retirement system.

The new two-pot retirement system was introduced on 1 September 2024, and by the end of October 2024, SARS had received just over 1.2 million applications for tax directives for retirement withdrawals. 

Of these, 1.1 million applications were approved, totalling almost R22 billion in withdrawals. Pension fund managers have reported similar observations.

For example, Momentum processed over 150,000 withdrawal claims amounting to R2.5 billion. Old Mutual received 125,000 withdrawal requests totalling R1.7 billion within the first 10 days of opening its application system. 

Similarly, Alexander Forbes processed withdrawals exceeding R1.5 billion during the first two weeks of the new system.

These withdrawal rates are even more significant when considering that not everyone with a retirement fund qualifies for early withdrawal.

“If there was less than R2,000 in your savings pot when the 2-pot system was introduced, you were not allowed to withdraw any money,” Nedbank said. 

Members of a provident fund as of 1 March 2021 who were over 55 when the system was introduced also had to opt into the system to access their savings pot.

“The window for opting in closes on 1 September 2025, so there may be further withdrawals as older pension fund members opt into the system.”

While there are several reasons for these high withdrawal rates, it mainly points to South Africans’ economic pressures, Nedbank explained. 

“In recent surveys of pension fund managers, many speculated that most people withdrawing money from their savings early would use it to fund a large expense, like a deposit on a house or a new car.”

“Some financial analysts were also convinced that consumers would go on a spending spree. But the reality is somewhat different.” 

Nedbank ATTRIBUTE_ Martin Good_Shutterstock

According to data from a JustMoney.co.za consumer survey of more than 6,000 respondents considering withdrawals from their retirement savings, 79% said they would use the funds to repay debt. 

Similarly, a survey by Discovery also found that many people were using the extra money for education, mostly to pay children’s school fees. 

The fact that withdrawals are being used to pay off debt, car or home financing, or for education, is a reliable indication of intense financial pressure, Nedbank explained. 

“This trend – and the sheer volume of withdrawals – show the serious financial pressure that South Africans are under.”

However, while people may be making withdrawals out of necessity, there are many risks associated with early withdrawals, Nedbank warned. 

“Your retirement fund is a long-term investment that attracts compound interest – this is the growth upon growth that your investment achieves over time.”

“You can invest in your retirement funds continually, and the longer you leave the funds to gain interest, the more chance you have of growing wealth.”

“If you withdraw R30,000 from your savings, for example, after 10 years, your retirement fund will be about R77,000 smaller than it would have been if you’d left that R30,000 in the fund. This shortfall only gets bigger as more time passes.”

You should also consider the tax implications carefully, the bank added. 

“You will lose a significant amount of any withdrawal from your savings pot to tax because you are taxed on these withdrawals at your marginal rate.” 

“So, if you withdraw R30,000 and your marginal rate is 45%, you will receive only R16,000 once tax and fees have been deducted. Your tax rate when you get to retirement age could be lower.”

“If you can afford to leave your retirement fund savings untouched to attract long-term compound interest, your long-term retirement investments will achieve optimal growth.”

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