South Africa sitting on a retirement time bomb

South Africa’s new two-pot retirement system will go live in less than two months, with potential risks and benefits for retirement savings in South Africa.

From 1 September 2024, South African retirement fund members will see their retirement savings split into two pots.

The “savings” pot will receive one-third of all retirement savings. It will be accessible before retirement and designed for emergencies.

A “retirement” pot will receive two-thirds of all savings and be accessible upon retirement, ensuring that most retirement funds can accumulate.

A third “vested” pot will hold the retirement savings accumulated until 31 August 2024 and remain subject to existing legislation.

Reactions to the new system have been mixed. Some state that it eats into retirement savings and leaves members much worse off in retirement, while others argue that it is better than the current system, where fund members can access a portion of their savings before retirement when changing jobs.

According to Siyasanga Kashe from Momentum Corporate, South Africa is sitting on a retirement time bomb.

Kashe said: “With only 6% of the country’s population on track to retire comfortably, are we really ready to start dipping into our retirement savings while preserving our futures?”

However, she did acknowledge that the system does still have several benefits, which many South Africans are in desperate need of:

• Emergency access: The ability to access savings in times of need without quitting your job is a game-changer. This feature provides a safety net, allowing individuals to handle financial emergencies without compromising their long-term retirement goals.

• Disciplined savings: By restricting access to the retirement component until retirement, the system ensures that individuals are preserving funds for their future. This compulsory savings aspect is crucial in a country where saving for retirement has not been a strong cultural practice.

• Improved financial security: With the vested component still growing through investment returns and regular contributions being split between savings and retirement components, individuals can build a more secure financial future.

What to do

With September around the corner, South Africans must understand the implications and benefits of the two-pot system.

Kashe said that education and clear communication are vital.

When looking particularly, she recommended the following:

• Stay informed: Attend educational sessions and read all communications from your retirement fund provider.

• Evaluate your financials: Assess your current financial needs versus your long-term retirement goals. The savings component should only be used in genuine emergencies.

• Plan contributions: Be aware of how your contributions will be allocated. From September, contributions will be divided between the savings and retirement components. Understanding this can help one understand their finances better.

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