Ina Opperman

By Ina Opperman

Business Journalist

Two-pot retirement system: these are the risks

If you withdraw some of your retirement savings in the two-pot retirement system before retirement, you will have less money to retire on.

While millions of South Africans are waiting to access their retirement savings in September when the two-pot retirement system is implemented, various experts are warning about the risks this will have for consumers’ retirement savings.

In February parliament gave the green light to the Pension Funds Amendments Bill which, once signed into law by president Cyril Ramaphosa, will enable workers who are strapped for cash to access a portion of their pension funds before retirement, for the first time.

The Bill will enable workers to access a third of their pension savings at any time before they reach retirement age, while the rest will remain untouched until retirement. The reform aims to create better outcomes for retirees by promoting higher levels of savings and by dissuading South Africans from withdrawing all of their retirement savings early, in the event of retrenchment or other emergencies from 1 September this year.

Yet, experts say it risks the sustainability of the country’s retirement industry as funds may flood out of the system. Although it is widely agreed that there are tangible benefits for workers, especially those who are among the millions of South Africans currently drowning in debt, there are also real calls for caution.

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A positive development, but beware of irresponsible spending

Dr Ntokozo Ndimande, an academic at the University of KwaZulu-Natal, says that while this is a positive development, it is imperative that the workers spend their money wisely to avoid burdening the state in future. He also warns that consumers must avoid irresponsible spending at all costs and suggests that consumers should only use these funds to settle debt or start a new business.

Rael Bloom from Coronation Group warns that the rapid flood of money out of the system once South Africans are allowed to withdraw from their “savings pot” is one of the biggest risks associated with implementing the largest retirement reform in South African history.

“In real terms this means that pension fund managers will have less capital to invest to generate a return on investment for contributors who will therefore have less chance of capitalising on the effects of compounding returns.”

This cautious approach is supported by the latest Sanlam Benchmark Survey findings that shows that less than 10% of retirees can maintain the same standard of living they enjoyed before retiring.

Neil Roets, CEO of Debt Rescue, agrees and says that while the two-pot retirement system can provide great relief from indebtedness or relief in a financial emergency, any way you look at it, there will be a diminished pension fund payout after retirement age.

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Two-pot retirement system vs sustainable saving

He also points out the risks and implications of this option in terms of sustaining contributors through their retirement.

”Most South Africans already cannot save enough money to sustain them through their golden years. Withdrawing a full third of their retirement fund before retirement age will substantially diminish their portfolio and severely affect the compounded interest, thereafter leaving them with far less to survive on in later years.”

The latest Baseline Survey found that 46% of adults tend to prioritise current spending above saving for their future and that is where the real danger lies.

“Approaching the withdrawal option as a source of liquidity and funding during difficult times – and these are indeed difficult times – may very well undo all the years of saving for the retirement years, leaving workers vastly more dependent on a government pension or their relatives.”

Roets, therefore, calls on South Africans to exercise restraint when considering this option. He says it is vital that South Africans take the time to enlighten themselves about the new legislation to ensure they can make an informed decision when withdrawing their funds.

A recent Debt Rescue survey shows that 51% of South Africans have a strong understanding of retirement savings options, such as pension funds, retirement annuities. In terms of funding mechanisms, personal savings (28%) and employer-provided pensions (24%) were the most cited means for future retirement funding.

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Encouraging that people have retirement savings

Roets says it is encouraging that slightly over half of the respondents polled (51%) have some form of plan or annuity in place. However, when participants were asked about their confidence in their retirement savings sufficing for a comfortable lifestyle, 40% were not confident at all, while only 24% were extremely confident. A full 59% of people polled admitted to being completely unprepared, having no savings or plan for retirement, while only 4% felt they were fully geared up for retirement.

In addition, he points to millions of consumers’ current burden of debt.

“At the end of 2023, South African households had close to R2 trillion in outstanding debt, with R25.8 billion in default. It is understandable that the early withdrawal option from the retirement fund can offer a possible short-term solution to their financial predicament.”

However, he says, this must be mitigated in some way, to ensure that there is enough money in the fund, come retirement.

Roets says if you do withdraw your share, it is important to invest the lump sum wisely to create an income to supplement your diminished pension fund payout, especially as this must see workers through their golden years.

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Two-pot retirement system requires careful thinking

“Once your debt is cleared, invest the rest of your one-third portion in a savings fund that will build interest over the remaining years. Consult with a financial adviser who can guide you on how to make a smart investment, no matter how small, that can help you make your money grow.”

Roets’ advice for consumers who can still save for retirement fund is to keep the big picture in mind.

“If, like so many working South Africans, you are drowning in debt due to the escalating cost-of-living crisis and need to access a portion of your pension fund simply to keep afloat, only do so as a carefully considered last resort.”