South Africans are not saving enough for retirement

 ·22 Apr 2024

The upcoming two-pot system should provide much-needed relief for cash-strapped South Africans, but they must not forget the big picture.

In February 2024, parliament gave the green light to the Pension Funds Amendments Bill, which, if signed into law by President Cyril Ramaphosa, will allow workers to take out a portion of their retirement funds before retirement.

Under the new system, a savings component will allow South Africans to receive one-third of all retirement savings and be accessible before retirement.

The retirement component will house the other two-thirds of retirement savings and will only be accessible upon retirement.

A third vested pot will hold most of the retirement savings (excluding the 10% or R30,000 used as seed funding for the savings pot) before the 1 September 2024 implementation and follow current legislation.

It is widely agreed that there are tangible benefits for workers, particularly those growing in debt, but there are serious calls for caution.

The CEO of Debt Rescue, Neil Roets, said that while the two-pot system will help South Africans in distress manage a financial emergency or deal with their debt, the pension fund payout at retirement will be diminished.

”Most South Africans already cannot put away enough money to sustain them through their golden years,” said Roets.

“Withdrawing a full third of their retirement fund before retirement age will substantially diminish their portfolio – severely impacting the compounded interest thereafter – leaving them with far less to survive on in later years.”

Terrible savers

According to the FSCA’s latest Baseline Survey, 46% of South African adults tend to prioritise spending in the now-above savings for their future.

“Approaching the withdrawal option as a source of liquidity and funding during difficult times – and these are indeed difficult times – may very well undo all the years of saving for the retirement years, leaving workers vastly more dependent on a government pension or their relatives,” said Roets.

He said that it is vital that South Africans take the time to enlighten themselves about new legislation so that they will be informed if they make their one withdrawal per tax year.

A recent survey from Debt Rescue showed 59% of those polled admitted to being unprepared, with no savings or retirement plan, while only 4% felt fully geared for retirement.

“As of the end of 2023, South African households had close to R2 trillion in outstanding debt, with R25.8 billion in default. Understandably, the early withdrawal option from the retirement fund can offer a possible short-term solution to their financial predicament,” said Roets.

“However, this needs to be mitigated in some way to ensure that there is enough money in the fund come retirement age.”

Those who do take out a portion of their retirement fund to pay off debt should invest the rest in a savings fund that will build interest over the upcoming years.

“My advice to South Africans who can still put money away towards a retirement fund – or through their employer’s fund – is to keep the big picture in mind. 

“If, like so many working South Africans, you are drowning in debt due to the escalating cost-of-living crisis and need to access a portion of your pension fund simply to keep afloat, only do so as a carefully considered last resort.”

Read: Why the rand is back above R19 to the dollar

Show comments
Subscribe to our daily newsletter