New pension system in South Africa – avoid this big ‘don’t’

South Africans will soon be able to access large parts of their pensions before retirement, but Discovery Invest says consumers should instead use other savings products for shorter-term needs.

After several changes by the National Treasury and the Standing Committee on Finance, the two-pot retirement system will launch on 1 September 2024.

One-third will automatically go to the savings component and be accessible before retirement.

A minimum withdrawal of R2,000 will apply, and each retirement fund member will be restricted to one withdrawal per tax year.

The remaining two-thirds of retirement funds will go into the retirement component, which will be used to buy an annuity-providing product at retirement.

A third vested pot will hold most of the retirement savings until the two-pot system is launched and will follow current legislation.

The seed funding in the savings component will be 10% of the amount saved in the vested component, up to a maximum of R30,000.

The idea of the two-pot system is to ensure that South Africans can access liquidity in an emergency, with the Covid-19 pandemic showing that immediate needs can sometimes outweigh longer-term goals.

Not a new savings product

Although South Africans will be able to withdraw from the savings component, Craig Sher, Head of Research and Development at Discovery Invest, said that South Africans should try to avoid withdrawing from their retirement nest egg.

“As an example, due to compound interest, money that is put away at age 30 will have 5-6 times the buying power at age 65 compared to money that is not saved,” said Sher.

“An additional disadvantage to withdrawing your retirement savings early is that there will be a higher tax rate applied to any savings withdrawal claims.”

Moreover, other savings products, such as 32-day notice accounts, will still be necessary after implementing the two-pot system.

“The two-pot retirement system is just a way to withdraw money from your retirement fund and should only be used as a last resort.

“Other savings for short—and longer-term periods to meet different needs are still crucial.”

With the implementation of the new system only six months away, Sher noted that retirement savings are safe, with Discovery facing no liquidity risks due to the maximum R30,000 seed funding needed for the savings pot.

“We encourage clients to stay invested over the long term, and our retail business doesn’t expect significant early withdrawals. However, if there are significant early withdrawals, this doesn’t impact Discovery’s liquidity.”

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