Warning over new pension system in South Africa

The proposed two-pot retirement system will bring short-term relief to those with financial challenges but will also potentially cause long-term pain if not handled with care, says Thys van Zyl, the head of product development at Everest Wealth.

He said that the option to withdraw retirement money when push comes to shove would potentially bring immediate much-needed relief to many. However, it must be done cautiously as it could have dire consequences on long-term retirement savings.

Van Zyl said that statistics show that only about 6% of South Africans will one day be able to retire comfortably, while the rest will depend on their children, the state or other possible sources of income.

The two-pot system would allow members of pension and provident funds, as well as retirement annuity investors, to access a portion of their investment each year before they reach retirement age and without resigning.

Van Zyl’s concern comes following the announcement made earlier this week (12 June) that the National Treasury had published draft legislation for the new two-pot retirement system which is set to take effect from 1 March 2024.

Under the proposed alterations, retirement funds would be broken into the following:

• The vested pot (amounts accumulated before the implementation date);
• 1/3 accessible savings pot and;
• 2/3 retirement pot is subject to complete preservation until retirement (contributions after 1 March 2023 must be preserved until the retirement date).

“It will obviously be very tempting to have the opportunity to withdraw money every year, especially in times of financial difficulty. With rising costs of living due to skyrocketing interest rates and the load-shedding crisis, many consumers are struggling to make ends meet, and this can be an easy way to gain access to money that would otherwise not be available,” Van Zyl said.

“If money is withdrawn on a regular basis, this will result in this worker having much less money saved over a long period of time than someone who has not touched their money at all.”

“That money that was withdrawn could have grown a lot over the specific period, and it can make a significant difference in the amount that is finally available for retirement. Therefore, regularly withdrawing your savings will have a compounding impact over time and is definitely not something that one should continue to do or even do regularly.”

The head of product development added that workers who withdraw money from their retirement fund would likely not be in a position to top it back up.

Van Zyl’s concern echoes public opinion in South Africa that remains divided on the new retirement system,

A recent Sanlam report found that 57% of respondents expressed scepticism towards the two-pots system.

Many individuals are worried about the potential long-term impact on their retirement savings. When faced with emergencies, 21% of respondents stated their willingness to withdraw funds from their retirement savings. Moreover, 13% expressed their openness to accessing a portion of their benefits outside of emergency situations.

Only a small percentage of respondents (8%) expressed their intention to use the new two-pot system. Interestingly, only 23% of respondents indicated their commitment to refrain from withdrawing funds from their retirement savings altogether.

Read: New finance laws for South Africa – changing pensions and targeting auditors