Nedbank warning for pension fund members in South Africa

Nedgroup Investments is the latest financial services provider to warn South Africans about the potential dangers of early withdrawal from the new two-pot retirement system.

The two-pot system is set to go live on 1 September 2024 and will see retirement savings split into two – “savings” and “retirement.”

The “savings” pot will hold one-third of all retirement savings after the system is implemented and will be accessible before retirement.

The “retirement” pot will hold the remaining two-thirds and will only be accessible upon retirement.

This will ensure that the majority of savings are kept for their intended purposes while allowing members to access liquidity in an emergency.

A third “vested” pot will hold the savings from before the implementation, except for a maximum of R30,000, which will be used as seed capital in the “savings” pot and will follow existing legislation.

While the two-pot retirement system will allow you to withdraw funds from your savings pot once every tax year, Nedgroup Investments said that understanding the long-term impact of withdrawing early is crucial.

“While the savings pot offers flexibility by allowing you to access some of your funds before retirement, we encourage you to choose wisely and only withdraw in the event of a financial crisis or emergency,” said Nedgroup Investments.

“All withdrawals from your savings pot are treated as taxable income and will be subject to tax in accordance with your marginal tax rate, meaning that a portion of the money you withdraw will go to taxes and reduce the amount you receive.”

“Frequent withdrawals will impact your financial future, give you less to grow through investments and ultimately reduce the income available for you at retirement.”

On top of this, continuous saving will also ensure positive results in the long term.

Through consistent contributions and minimal withdrawals, many allow their savings to grow and benefit from compound interest.

Compound interest means that one’s savings earn interest on both the initial amount and the accumulated interest, which leads to exponential growth.

Even small savings can grow significantly, creating a substantial nest egg for retirement.

“As we prepare for the new two-pot retirement system, our key takeaways are that withdrawals from the savings pot will be taxed at your marginal tax rate and ultimately reduce your future retirement income, said Nedgroup.

“Continuous saving and avoiding unnecessary withdrawals will maximise the growth of your retirement savings, and the power of compound interest can significantly enhance your retirement fund over time.”

Not the first

Nedank is not the first financial institution to share this warning with retirement fund members.

Many asset managers, such as Allan Gray and Coronation, state that it is detrimental for South Africans to withdraw their retirement funds unless necessary. They also warned about the tax consequences and the impact on compound interest.

South Africa also has a dismal savings rate, with more flowing out of retirement funds than being added.

The South African Reserve Bank warned that the new retirement two-pot retirement system will exacerbate the problem.

Although it said that the annual net outflow is likely to dwindle and the industry will reach a new steady state under the new two-pot system, it said that it could make things worse in the near term.

In a high withdrawal, the bank states that people will withdraw an additional R100 billion from the savings pot of their pension funds.

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