According to FNB’s Retirement Insights Survey, less than 10% of South Africans retire comfortably. This is just one of the many concerning pieces of data from the latest edition of the annual survey. But what does the introduction of the two-pot retirement system from 1 September 2024 mean for those who are ill-prepared for retirement?
While many South Africans may see this new system as an opportunity to access their retirement savings early, it’s very important to think carefully about how withdrawals will impact your retirement pension funds, retirement annuities or preservation funds if you want to retire comfortably.
Following President Cyril Ramaphosa’s approval of the Pension Funds Amendment Bill which paved way for the implementation of the two-pot retirement system, Ester Ochse, Product Head at FNB Integrated Advice, is of the view that the two-pot system is intended to encourage South Africans to preserve their retirement savings while allowing access to a portion of funds, in the event of a very serious financial emergency.
“Taking money out of your retirement savings can slow down the growth of compound returns. Even if it feels like it’s only a small withdrawal for now, it could make a big difference to the amount that you can fully-access when you retire. So, it’s best to only take money out if it’s an emergency and you have no other options. It’s also critical to consult a qualified financial advisor who can quantify the impact of withdrawing your retirement savings.”
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Under the two-pot system, retirement savings existing before the 1st of September 2024 will be defined as the “vested pot” and you will not be able to contribute into the vested pot after the 1st of September 2024. This vested pot will have the same retirement rules that are applicable to your retirement savings before the 1st of September 2024.
From the 1st of September 2024, all future contributions into your retirement fund will be split into two: one third of your contributions will go into a “savings pot” and two-thirds will go into a “retirement pot”.
To kickstart the savings pot, your initial contribution will be seeded from the vested pot; the seeding amount will be 10% of the of the total funds available in your vested pot subject to maximum seeding of R30 000. Seeding into the savings pot will be once-off and future funding will come from one-third of your future contributions. The retirement pot is funded from two-thirds of future contributions and will only be accessible at retirement age.
Even though the savings pot can be accessed once a year there are some applicable rules:
- You can only access it once a tax year (1 March – end February)
- The minimum withdrawal amount is R2,000
- Withdrawals will be taxed in line with your marginal tax rate
- SARS will prescribe the amount of tax to be paid via a tax directive issued to the administrator
- SARS is legally allowed to collect any outstanding taxes or penalties from your savings withdrawal benefit
While it may be tempting to dip into the savings pot on a regular basis, this will have significant impact on long-term retirement stability and one’s retirement lifestyle. For illustration purposes, let’s meet Julia, a 45-year-old nurse who has a current retirement value of R500,000, contributing R1,000 per month (which increases at 5%) and has a retirement age of 65.
| Scenario | Total Retirement Value | Difference |
| If Julia does not dip into the savings pot and lets it grow until she is 65 | R3,168,000 | N/A |
| If Julia makes a once-off R100,000 withdrawal for an emergency, 15 years before retirement | R2,952,000 | R216,000 |
| If Julia decides to reduce her annual expenses by withdrawing the maximum amount each year until retirement | R2,759,000 | R409,000 |
*Figures are for illustrative purposes only and are rounded to the nearest 1000.
We see, from the above illustration, that even a once-off withdrawal early on has an impact on retirement savings but, by far, the most significant impact is the regular withdrawal from Julia’s savings pot. To put this in perspective, the R409,000 could buy an annuity in retirement of approximately R3,900 per month.
Furthermore, the above example shows that one really does need to weigh the short-term gain against the potential long-term hardship that can result from withdrawing from retirement funds. It also illustrates the importance of building up emergency savings so the need to dip into retirement funds, should an emergency happen doesn’t arise.
“As an integrated, advice-led, lifestyle and financial services provider, our ethos is ‘help changes everything’. That’s why we always want to help our customers achieve their financial planning goals and enjoy the benefits of staying the course of their long-term savings, including planning smart for their retirement,” concludes Ochse.
Supplied by FNB
