Two-pot retirement system can help SA workers save for retirement

The two-pot retirement system can help 70% of South African workers save for retirement as limited access to only a portion of their pension savings will allow more members to enjoy a comfortable retirement.

More and more workers are unable to preserve their retirement funds according to the latest 2023 Old Mutual Savings and Investment Monitor Survey, while South Africa’s retirement savings crisis has reached a critical point already, with a recent Debt Rescue survey finding that consumers are now more scared of retirement than they are of dying.

In response to this growing retirement crisis, the South African government proposed a retirement reform aptly named Two-Pot, a new system that promises to provide a sustainable and practical means for South Africans to balance managing immediate financial needs and long-term retirement planning.

However, its ultimate success will depend on individual discipline and comprehensive financial education, says Michelle Acton, retirement reform executive at Old Mutual.

Two-pot retirement system: How it works

She says set for implementation on 1 March 2024, this system at its core requires that every pension fund member saves two-thirds of their future contributions in a “retirement pot” specifically for income at retirement.

The balance of the contributions will be allocated to a “savings pot”, which is specifically meant for a lump sum at retirement but members can access it before retirement, subject to some limitations. It is a convenience that comes with risks.

Acton says this means that for every R100 a member contributes, R66.67 will be added to a “retirement pot”, which cannot be accessed until retirement and the remaining R33.33 into a “savings pot” that can be withdrawn once a year.

Any savings pot balance left over before retirement can be taken as a lump sum at retirement.

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Two-pot system will prevent cashing out retirement funds

“The rationale is simple. When most South Africans leave a job due to retrenchment, termination, or resignation, they typically withdraw their retirement savings instead of transferring it to a new employer or putting it in a preservation fund.

“The 2023 Old Mutual Savings and Investment Monitor confirmed this disconcerting trend of early withdrawals.”

With a sample size of just over 1 500 participants, the survey showed that less than a third (29%) saved all their retirement money when they left their employer. Approximately 1 in 3 people decided to cash out all their retirement savings.

Acton says this trend is worrying as it could mean these individuals may not have enough money for a comfortable retirement.

The survey also revealed that 62% of participants with retirement funds would likely use some of their retirement money before they retire if the rules allowed it and Acton says these findings highlight the importance of the Two-Pot reform, a change designed to help people plan their retirement savings more responsibly.

Under the Two-Pot system, retirement fund members who need money can withdraw some of their accessible cash pot before retirement without quitting or resigning from their jobs.

A maximum of 10%, capped at R25 000, of your existing savings will be used to seed the savings pot on day one from existing retirement savings and the minimum withdrawal amount from the savings pot is R2 000, with no maximum amount.

If you have, for example, a total of R100 000 in your retirement fund, 10% or R10 000 will be transferred into an accessible “savings pot” when the system starts and you can withdraw a minimum of R2 000 or the entire amount in the savings pot.

However, Acton warns consumers to keep economic challenges in mind before making any plans.

“Economic factors such as inflation, interest rates and overall market performance could influence the growth and value of retirement savings in both pots.

“Beyond this, unfavourable economic conditions, such as recessions or job losses, drive more people to access their savings prematurely, affecting long-term retirement security.”

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Under-saving for retirement an issue in SA

She says the Covid-19 pandemic was the “perfect storm” to highlight South Africa’s savings crisis.

During the pandemic, many individuals had no emergency funds for necessities, medical or funeral expenses to bury loved ones. This savings crisis had a far-reaching impact on long-term financial health and retirement planning and despite the global economic recovery, under-saving for retirement remains an issue, she says.

“Even before the pandemic, less than 6% of employees could afford to retire comfortably at the age of 65, according to estimates from National Treasury.

“The odds are that many retirees will outlive their retirement savings due to reduced protection and longer life expectancy and they will have to accept a standard of living far below what they envisioned.”

Although not everybody thinks that the Two-Pot system is a good idea, there are benefits to early access to retirement savings.

“As the statistics show, when members do not have money to take care of an unexpected event or are pressured to pay off debt, they resign to access their pension savings, often depleting it. Therefore, the Two-Pot accessible pot option provides a buffer against the depletion of retirement savings, making it easier for members to preserve their long-term retirement savings.”

Acton says one of the pillars of sound personal financial management is having an emergency savings fund, a designated amount to cover unforeseen expenses.

It acts as a financial safety net, providing a readily available reserve of cash that can be accessed easily when unexpected events occur, such as medical emergencies, car repairs, job loss, or any other unforeseen financial challenges.

“The purpose of an emergency fund is to discourage over-reliance on high-interest debt, such as credit cards or loans, during times of crisis. Instead, it allows individuals to handle unexpected expenses without derailing their budget or long-term financial goals.

“Unfortunately, many South African households do not have emergency savings and rely on credit or, in desperation, cash in their pension savings when the opportunity arises.”

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Many anticipated benefits for Two-pot system

Therefore, she says, there are many anticipated benefits of this new pension system with built-in access.

“This system is projected to encourage a culture of savings. By providing a safety net, the accessible savings pot reduces the perceived risk of locking away retirement funds. Consequently, this could stimulate a higher participation rate in pension schemes and therefore contribute to mitigating the retirement savings crisis.”

Early access to one-third of their retirement savings can prevent pension fund members from falling into a debt trap due to unforeseen emergencies or financial shocks and members can use their savings to weather financial hardships instead of resorting to high-interest loans or detrimental debt cycles, she says.

“Maintaining two thirds, a substantial portion of retirement savings until retirement provides a disciplined structure to ensure retirees have sufficient funds to maintain a standard of living after their working years. This portion will continue to grow over time, compounded by the returns from the pension fund’s investments.”

However, Acton warns this reform is not a magic wand to wield indiscriminately in the short term, but rather a long-term mechanism to ensure a better standard of living at retirement.

Individual discipline in preserving even accessible retirement funds remains critical and additionally, widespread financial education is essential for the system’s success.

“By empowering individuals to make informed decisions about their savings, we can look forward to a solution for the current crisis and a significant shift towards a culture of sustainable retirement planning.”