The Two-Pot Retirement Fund Challenge
The recently introduced two-pot retirement system, introduced as of 1 October 2024 in South Africa, was designed to address the issue of early retirement savings withdrawals. The system divides retirement savings into two “pots”, one for short-term needs and another for long-term preservation.
As of 18 November, just 2.5 months since the launch of the two-pot system in September, SARS has issued over 1.9 million directives to the value of over R35 billion under this system. The steady increase in applications highlights the economic challenges faced by many households and the importance of the two-pot system for meeting urgent needs.
Taking a Practical Look at the Implications
Practically, we analyzed someone with R2,1 million in retirement fund savings – at age 55, who has a bond of R500 000 (with 10 years of bond repayments still due) plus a credit card balance of R35 000 and other loan amounts of R40 000. Total debt =R575 000.
This person would be paying the following monthly:
- Bond – R3945 per month (at current average bond interest rates)
- R2250 in monthly credit card payments
- R1026 in monthly instalments on personal loans
Total approximate monthly instalments = R7221 per month
The person can with draw 30% of their retirement savings – so R700 000 of which they will pay R125 000 in tax to SARS leaving them with R575 000 balance
If they were to pay off all their debt this would allow for an improved lifestyle with less debt pressure and leave them with a fully paid off property asset that they can retire in or sell when they retire.
A Good Outcome
A good scenario perhaps, particularly if the person uses the savings or part thereof to invest and create additional income for the future, such as a retirement annuity policy or others such as interest free savings accounts.
A basic long-term savings investment account with R3500 invested a month for a 10-year period, will provide a total return of around R783 000 – an 86% return on investment.
What the Retirement Income Implication is
The counter balance effect on their retirement savings from the withdrawal, would be that the monthly retirement benefit they will enjoy at retirement, will move from around R8750 a month to around R5833 a month paid until an age 105. A decrease of 33%.
With an average consumer inflation of 5% per year taken into account, this would result in a 62% increase in living expenses in 10 years to whatever the person’s monthly expenses are today. So someone with R7000 in average monthly expenses will need around R11,340 a month when they retire in 10 years’ time.
The sad reality though is many people applying for withdrawals are not in fact using this money to settle debts and are creating hardships for themselves further down the line.
Financial Assistance or Financial Pitfall?
Schalk Fischer, Insurance Vertical Sales Leader at TransUnion Africa spoke about the new Two-pot system commenting that “Systemic issues such as high living costs and stagnant wages mean that many may continue to prioritise immediate needs over long-term security. With the two-pot system allowing consumers a single withdrawal per tax year, the second wave of applications is expected to start in March 2025, with drawdown estimates ranging from R50 billion to R60 billion”.
“Does early access to retirement funds provide a lifeline or a potential pitfall for underserved communities?” he questions, “While the two-pot system can meet immediate needs, misuse of these funds, especially for non-essential purchases can undermine long-term financial stability”.
Discovery data indicates that nearly 40% of low-income earners (under R125,000 annually) withdrew funds, compared to only 4% of high-income earners (over R1 million annually).
Security Concerns
An additional concern is when large amounts of money and transactions are involved it creates a significant incentive for fraud. To efficiently mitigate these risks, industry players need a comprehensive approach that combines robust processes, advanced fraud detection systems, and strengthened identity verification and authentication practices.
In addition, clear fraud prevention policies, industry collaboration, and fraud awareness programmes to regularly educate consumers are essential in creating more awareness and guarding against possible exploitation.
The Role of Financial Literacy for the Long Term
Financial inclusion is not only about availability and access to financial products but is also about equipping people with the tools and knowledge they need to make wise financial decisions. Addressing these challenges requires expanding financial inclusion efforts to include financial education, digital accessibility, inclusive product design, and creating more effective cross-sector collaboration.
Effective financial literacy programmes should cater to specific consumer needs. Some consumers would benefit from programmes that prioritise basic financial products and skills, such as budgeting, saving and building a financial track record.
Others may benefit from access to insights on investing, retirement planning and risk management. By understanding and addressing the unique needs of consumers, financial inclusion initiatives can empower people to make informed choices that support both short-term well-being and long-term security.
