Old Mutual warns that the new two-pot retirement system, which will become operational next year, could negatively impact the entire purpose of retirement funds.

From 1 March 2024, South Africans will be able to put their savings into two separate retirement pots.

Up to one-third of all retirement contributions will go into a “savings pot”, which will be accessible once a year.

A more standard “retirement pot” will receive at least two-thirds of the contributions made after 1 March 2024, which will only be accessible at retirement.

In addition, a third “vested pot” will also exist in the new system, which features the contributions already saved at the implementation date, and will remain subject to current laws. The laws state that a maximum of 10% of a member’s, capped at R25,000, will be used to feed the savings pot.

The idea of introducing this pot is to give South Africans access to their retirement savings in the case of an emergency. The new system will also discourage people from resigning to access their pensions – which has become more common in recent years, especially during the pandemic.

Keith Peter, Advice Manager at Old Mutual Personal Finance, said that the new system has potential drawbacks, despite its appeal.

“The savings pot, while promising on the surface, should primarily be seen as a reservoir for emergencies. The temptation of short-term financial alleviation can lure consumers into frequent withdrawals. However, such actions can drastically erode the capital necessary to generate an income during retirement,” Peter said.

“This issue is exacerbated if the monthly contributions made to the fund, including the retirement and savings pots, are insufficient to meet the desired retirement income. On top of all that, the annual withdrawals from the savings pot will be taxed at the member’s marginal rate, increasing tax liability.”

Example

To prove his argument, Peter looked at an example of a 45-year-old woman who plans to retire at 60. She earns R60,000 a month and contributes 15% to her retirement fund.

Her contributions scale by 6% annually, with salary increases, and the projected growth before retirement is 8%.

If the current fund value is R500,000, the fund value at retirement should be just over R6.1 million – granted that she doesn’t make any withdrawals.

If she accessed all her funds from the savings pot annually from 1 March 2024, her overall fund value could decrease by R1.5 million from R6.1 million to R4.6 million. She would also have no access to a lump sum – assuming she did not have access to a vested pot.

“With this example, it’s clear that we must base our withdrawal strategy on the customer’s needs. A good rule of thumb is to exercise withdrawals from the savings pot in emergencies only, where the individual is in dire financial stress, such as the inability to pay home loans or vehicle finance,” he said.

He said that one way to avoid the risks associated with the new system is to refrain from using the savings pot if possible.

He said that members could consider revisiting their budgets, debt consolidation and negotiating payment arrangements instead of accessing the savings pot.

“The aim should be to view accessing the savings pot as a last resort and explore other viable alternatives to service debt and manage expenses. Ideally, use retirement savings from the savings pot only in extreme circumstances, he said.

“For example, if a member makes a once-off withdrawal to settle capital debt, a good option is to redirect some of the freed-up regular instalments into the retirement fund to help replenish it. Of course, this strategy may not apply to all consumers, so balance it against other financial obligations.”

“Moreover, investing for prolonged periods also benefits members from the power of compounding, earning interest on both the capital and the interest already earned. It’s also crucial to remember that retirement fund contributions, are tax-deductible, thereby reducing the overall tax liability and making them an efficient investment vehicle.”

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