Two-pots, or two potholes…

Faculty and Staff

14 Oct 2024

As from 1st September 2024, the two-pot retirement reform came into play. The pots are divided into a savings component and a retirement capital component. The savings component is accessible prior to retirement, this is made up of 10% of your total capital up to a maximum of R30 000.

Ongoing contributions towards your retirement savings vehicle will also be split – one third to the two-pot system’s savings pot, with the balance going towards the retirement pot.

The intention behind this reform is to encourage retirement savings, while still promoting the flexibility to access a portion of the funds in the case of an emergency. An emergency as defined is “an urgent need for assistance or relief” (Webster, 2024). Prior to this reform coming into play, emergencies still existed, and we were able to make a plan, what makes this any different today?

When we look at the fundamental principles of the accessibility of the two-pot system’s savings pot, one of the steps is that the portion we voluntarily choose to withdraw will be subject to tax at our marginal tax rates.

This means that a tax directive will have to be applied for.

Potential Risks and Realities of Early Retirement Fund Access

This triggers two red flags, one in that a directive can take up to 21 working days to receive. The second red flag is that when the South African Revenue Services (SARS) is privy to any money coming our way, they have the right to withhold any amount that is due and owing to them.

Furthermore, we should be cognizant of the fact that the truest intention behind the two-pot system’s retirement provision is just that. We are ultimately making provision for our impending retirement years. The years that we should be unequivocally enjoying, celebrating all the decades of hard work and reflecting on our successes.

Normal retirement age in South Africa is age 55, but we are seeing more people retiring later as affordability to retire comfortably is heavily restricted. Only 7% of South Africans are able to retire comfortably – this is a devastating statistic.

When we choose to withdraw from the two-pot system’s savings pot, we are negating the intention behind retirement savings. We compromise the benefit of compound interest, and the luxury of time-value-of-money, which can never be replaced.

The Cost of Early Withdrawals in the Two-Pot System: A Real-Life Comparison

Consider this scenario: Tiffany and Mandla, both 40 years old, have decided to save for retirement by using a retirement annuity within the two-pot system. Both contribute R1 000 per month to their respective retirement annuities, both with the same underlying portfolios, which grow at 10% a year.

Tiffany withdraws 10% every 12 months to help with various emergencies. Mandla resists the temptation of the withdrawal. At the end of 20 years – where both members will be aged 60, Tiffany will have R230 175 saved in her retirement annuity, while Mandla will have R723 987 saved.

It is paramount to your financial future that prior to considering any withdrawals from your two-pot retirement savings, that you consult your financial advisor as they will be able to guide you surrounding the consequences of such a decision over the longer term.

Final Thoughts

Planning for retirement is one of the most important financial decisions you’ll make in your lifetime. As seen in the example of Tiffany and Mandla, even small withdrawals from the two-pot system can significantly impact your future savings, it’s crucial to seek guidance from financial experts.

Remember, you are not at all obligated to withdraw from the savings pot. I will end this off by saying this, “short-term sacrifice, for long-term goal”. This school of thought has become my compass when having to navigate around the potholes that life has thrown at me.
At Milpark Education, we offer comprehensive financial planning and business management programs designed to help you navigate these important decisions with confidence. Empower your future and visit the Milpark Education website today and apply for a program that will equip you with the skills and knowledge to thrive in your personal and professional financial journey.

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Ashley Lachenicht Lecturer