What to do with your two-pot payday in South Africa

South Africa’s two-pot system is live, but consumers who withdraw from their retirement savings should use that money to pay off debt.

The two-pot system transfers one-third of all retirement savings from 1 September 2024 into a “savings pot,” which is accessible before retirement.

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

A third “vested pot” holds all the retirement savings until the implementation date, except for R30,000 used as seed capital in the savings pot, and follows prior legislation.

Many financial institutions have warned that withdrawing can impact one’s retirement savings, as one loses the benefit of compound interest.

There are also tax hits for those who withdraw early.

That said, it is recommended that those who do withdraw from their savings control their debt.

The latest GDP data from Stats SA showed that the economy grew by a modest 0.4% in Q2 2024, with improvements in the finance, trade, and manufacturing industries.

Household consumption also saw a significant rise, indicating consumer confidence.

Inflation dropped to 4.6% in July – the lowest level in three years.

The lower inflation print means many believe the South African Reserve Bank will reduce interest rates in September.

“The economic indicators are promising, but they come with a strong call to action for those struggling with debt,” said Sebastien Alexanderson, Head of National Debt Advisors (NDA).

“With inflation on a downward trend and the economy showing signs of improvement, now is the time to leverage these conditions to manage and reduce your debt.”

The new system has already seen many South Africans withdraw from the savings pot.

“Many are seeing this as a way to ease their financial strain,” said Alexanderson.

“However, it’s critical to use these funds wisely, especially when it comes to addressing existing debt. While the temptation might be there to spend on non-essential items, paying off debt can provide long-term financial relief.”

He added that paying off debt, particaurly high-interest debt like credit cards and personal loans, should be the priority for those who withdraw.

South Africans continue to struggle with levels of personal debt.

Although the National Debt Advisors reported a slight decline (3.3%) in consumers seeking debt help over the last year, total outstanding debt exceeded R1.47 billion (7.5% increase).

Consumers, on average, had four unsecured debts, one credit card and one store account.

“The figures we’re seeing are concerning,” said Alexanderson.

“While fewer consumers signed up for debt review compared to the previous year, the total outstanding debt has increased, meaning people are carrying more debt than before, yet fewer are seeking help. This is why it’s so important to take steps now to address these issues before they worsen.”

With the introduction of the two-pot system and the improvement in the economy, Alexanderson said that South Africans now have a unique opportunity to regain financial stability.

“Accessing a portion of your retirement savings should be done cautiously, but if you’re using these funds to pay down debt, you’re ultimately investing in your future.”

“Clearing your debt not only improves your credit score but also reduces financial stress and sets you up for better financial security in retirement,” said Alexanderson.”

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