3 ways South Africans are blowing their two-pot retirement payday
Once the two-pot floodgates opened, most people rushed to withdraw their retirement savings to pay for home and car expenses, short-term debt and education.
This was explained by Guy Chennells from Discovery Corporate and Employee Benefits on the Money Show with Stephen Grootes.
The new two-pot retirement system, which became effective on the 1st of September, divides retirement contributions, past and future, into three components.
One-third will be allocated to the savings component, which members can withdraw from at any point before retirement.
Two-thirds will go to the retirement component, which cannot be touched until retirement.
The new system is meant to help people build up their retirement savings, while also giving them some liquidity in the short term.
As soon as the withdrawals opened, billions of rands were taken out of the system.
While it may seem like there are an endless number of reasons people may choose to take out their savings, most people are using this money for only three different reasons.
Chennells explained that everyone who made a withdrawal from Discovery’s Whatsapp withdrawal channel was required to answer what they were planning on doing with the money.
This data showed that about 25% of the withdrawals were made for home and car expenses, 21% was for short-term debt, and another 20% for education.
Those three reasons made up the vast majority of withdrawals, at about three-quarters.
Chennells explained that these factors can be linked to South Africa’s cost of living crisis, which has led to home and car financing going up materially in the last couple of years.
He said that their interpretation is that people are using their two pot savings to take some pressure out of the system that has built up over the last few months “where it’s been really difficult to make ends meet”.
Many have turned to short-term debt to bridge financial gaps, and some are prioritising education even if it adds to their debt.
“We must be realistic that what the cycle many South Africans are in,” Chennells said.
In the past, South Africans would save for years, then cash out their entire pension savings when leaving an employer to pay off debt.
“They will work for a number of years, build up big debt, leave their employer, take the entirety of their retirement savings and pay that down.”
“That’s been the cycle save for a while. Take all of it, cash it all out, pay it all out.”
The new two-pot system allows people to access only one-third of their savings at any time, without giving up their income source by leaving their employer.
“It’s preferable for people not to touch their retirement savings.”
However, he recognised that for many, making these withdrawals can be a rational decision which can help relieve more immediate economic pressures.
“They are trying to make ends meet in a difficult circumstance which is precisely what the system is designed to help South Africans to do.”
The demographics of those making withdrawals also seem to support the fact that people who are making these withdrawals are in dire financial positions.
According to Chennells, Discovery is seeing very different withdrawal behaviours from people in different income groups.
Of those classified as low-income earners, earning less than R125,000 annually, almost 40% of them who could make withdrawals did so.
The difference is striking when compared to the high income group, which earns over R1 million per year, which only saw a withdrawal rate of only 4%.
That means that 10 times more people in the low-income group withdrew than the high-income group.
However, as high as it may seem, this number is still very conservative.
Chennells explained that while the low-income group had the highest withdrawal rates, it also had the lowest eligibility rates.
The savings pot is limited to withdrawals of over R2,000, which means that those with less savings are not eligible to take out money.
Because of this reason, only a third of Discovery’s low-income members were eligible to withdraw in September.
“So, two-thirds of them will still cross that R2,000 rand minimum eligibility boundary at some point in the future, and when they do, presumably, a chunk of them will also take what they can.”
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