Major red flags over the two-pot system in South Africa

South Africa’s two-pot retirement system has seen billions fly out of retirement funds, and data from Momentum shows that the most financially vulnerable could be at risk.

Since 1 September, one-third of all retirement savings have been placed into a “savings” pot, which can be accessed before retirement.

The remaining two-thirds are put into a retirement pot, which will only be accessible upon retirement.

A third vested pot will hold all the retirement savings until implementation, minus R30,00 used as seed capital in the savings pot. It will follow prior legislation.

Since its launch, the system has pocketed the South African Revenue Service over R4 billion.

Experts have warned that South Africans who withdraw from the new two-pot retirement system risk being pushed into a higher tax bracket and being taxed at a higher rate.

The Momentum Group has received over 112,000 applications, with a cumulative value of R1.7 billion. The group paid for 81% of the applications, and the percentage is slowly rising.

The withdrawals have also provided valuable insights into broader trends influencing the South African retirement landscape.

One of the key trends observed since the system’s launch is the age distribution of the applications.

Initially, most requests came from people in the 40 to 49 age group, which made up almost 40% of applications.

“It is worrying that individuals who are closer to retirement are withdrawing from the savings pot as they may not have enough time to make up for the shortfall,” said Mbethe.

As the system progressed, applications from the 30-to-39-year age group also increased relative to other age groups and closely reflected the demographics of national retirement contributors.

Notably, income distribution data further sheds light on applicants’ financial well-being and lack of financial literacy.

By 13 September, 60% of applicants indicated they were from low-income groups, earning too little to pay personal income tax.

Only 10% of applications were made by individuals indicating that they earn a taxable income of R500,000 and more per year.

The Momentum Unisa Financial Wellness Index showed that only 15% of South African households are financially literate.

Momentum said that its adviser teams were able to change the minds of some clients who sought to withdraw their retirement funds after giving them relevant advice or explaining the tax consequences.

Although the early trends suggest that many are accessing their savings to cope with tough financial conditions, they have also raised questions about how South Africans save for retirement.

“As the two-pot system continues to gain traction, we encourage South Africans to engage with a trusted financial adviser, and to consider alternative routes than drawing on their retirement savings, given the significant tax implications and negative impact on future retirement planning,” said Mbethe.

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