Financial Relief or Retirement Risk?

By Charles Kampfraath-Pawson

The impending rollout of the two-pot system is poised to provide much-needed financial relief to financially strained South Africans. However, it’s essential not to overlook the broader implications.

Under this new arrangement, South Africans can withdraw one-third of their retirement savings before retirement, with the remaining two-thirds earmarked for retirement and accessible only upon retirement.

Before the September 1, 2024 implementation, a third vested pot will safeguard most of the retirement savings, leaving out the 10% or R30,000 assigned as seed funding for the savings pot, in line with existing regulations.

In February 2024, Parliament greenlit the Pension Funds Amendments Bill, awaiting President Cyril Ramaphosa’s signature. This bill enables workers to tap into a portion of their retirement funds before reaching retirement age.

While there’s widespread recognition of the tangible benefits, especially for those grappling with debt, there are valid concerns that demand careful consideration.

Neil Roets, CEO of Debt Rescue, pointed out that while the two-pot system might assist distressed South Africans in navigating financial emergencies or debt, it could diminish the retirement fund payout at retirement. He stressed, “Most South Africans already struggle to save enough money to sustain them during retirement.”

Roets warned that withdrawing a full third of retirement funds before retirement age could significantly erode portfolios, impacting compounded interest and leaving individuals with substantially less for their later years.

A recent Debt Rescue survey found that 59% of respondents admitted being unprepared, lacking savings or a retirement plan, while only 4% felt adequately prepared. This underscores South Africans’ concerns about saving for retirement.

Regarding retirement funding, personal savings (28%) and employer-provided pensions (24%) were cited as primary sources. However, Roets expressed concern about the low percentage of individuals starting to save for retirement in their 20s, stressing the benefits of early savings.

Despite the concerns, Roets emphasized the importance of informed decision-making and urged individuals to educate themselves about new legislation before making withdrawals.

He emphasized, “The earlier you start saving for retirement, the sooner you can begin capitalizing on the effects of compounding returns.” Roets highlighted immediate tax benefits and the opportunity to double savings through employer matching contributions.

While Roets acknowledged the temptation to access retirement funds amid financial crises, he advised against it unless absolutely necessary. He recommended investing withdrawn funds wisely, stressing the importance of long-term planning and financial stability.

“South African households had close to R2 trillion in outstanding debt, with R25.8 billion in default by the end of 2023. While the early withdrawal option from the retirement fund can offer a short-term solution to their financial predicament,” Roets noted, emphasizing the importance of ensuring sufficient funds remain for retirement.

In conclusion, Roets advised, “South Africans who can still contribute to a retirement fund – or through their employer’s fund – should keep the big picture in mind. If, like many working South Africans, you are struggling with debt due to the rising cost of living and need to access a portion of your pension fund to stay afloat, do so only as a carefully considered last resort.”