Annual two-pot withdrawals could cost an employee R1 million at retirement. R399 600 now, or R1.01 million more later. That’s the choice facing employees under South Africa’s two-pot retirement system. This is according to a new analysis by René Richter. She’s the Reward and Benefits Lead Advisor at earned wage access and HR solutions platform Paymenow.
Annual two-pot withdrawals could cost an employee R1 million at retirement
Richter modelled the impact for an employee earning R30 000 a month who withdraws the full savings-component allocation every year for 30 years. They would pocket R399 600 in after-tax withdrawals over that period, but retire with about R1.01 million less than if they had left their retirement savings alone. The gap exists because of how the system is structured.
Employees typically reach for retirement savings when they’re under immediate pressure
Since 1 September 2024, one-third of new retirement fund contributions go into a savings component and two-thirds into a retirement component. Members may make one savings withdrawal per tax year, subject to a R2 000 minimum and available funds. Each withdrawal carries multiple costs. It removes capital that would otherwise compound. The amount is then added to taxable income and taxed at the member’s marginal rate, and the fund may deduct an administration fee on top of that. The cash an employee receives can be well below the amount taken out of their retirement savings.
The two-pot system helps stop employees resigning to reach their retirement savings
Take an employee earning R30 000 a month who contributes 15% of salary to a retirement fund, or R4 500 a month. R18 000 a year goes to the savings component, and R36 000 a year goes to the retirement component. With no withdrawals, the annual R54 000 contribution could grow to about R3.03 million in today’s money (which excludes the effect of inflation). Withdraw the full R18 000 savings allocation at the end of every year and only the protected R36 000 stays invested, reaching about R2.02 million at retirement.
The gap exists because of how the system is structured
“The two-pot system does what it was designed to do,” says Richter. “It helps stop employees resigning to reach their retirement savings, and it keeps them out of expensive credit in a genuine emergency. The risk is that the withdrawal becomes an expectation in the annual household budget, and that the compounding effects of interest aren’t taken into account.”
She added, “Financial education needs to move past explaining how to withdraw and start showing employees what they are giving up.” Employees typically reach for retirement savings when they’re under immediate pressure. Transport costs, a medical bill, a school payment or a household repair can open a cash-flow gap before payday. Without an alternative, the choice narrows to short-term credit or a withdrawal.
THE ARTICLE WAS COMPILED FOR THE TOTAL REWARD KNOWLEDGE HUB.
