Old mutual warns of a retirement disaster for South Africans
Old Mutual has raised the alarm over the growing risk of South Africans retiring without enough money.
This is according to Old Mutual’s head of financial education, John Manyike, who warned that the country’s new two‑part retirement system is being used in ways that could erode long‑term savings.
The system, which came into effect in September last year, allows retirement fund members to make limited withdrawals before retirement.
However, Manyike stressed that there has been a significant spike in early withdrawals from the savings portion of the reformed system.
Figures from the South African Revenue Service (SARS) show that members have withdrawn about R57 billion so far. Of the more than four million withdrawals recorded, just under 500,000 were repeat withdrawals.
Manyike said those most likely to draw from their savings are in the lower income bracket, earning between R5,000 and just under R10,000 a month, and are often aged between 36 and 40.
“The higher a person earns, the less likely they are to withdraw from the two parts,” he explained.
While the two‑part system was designed to help preserve retirement funds by preventing people from resigning to access their entire pension, Manyike stressed that people don’t understand the damage they are doing to the retirement funds.
“People have not yet appreciated the fact that these early withdrawals actually erode the value of the funds, so you’re likely going to retire very poor.”
He added that some people have been discouraged from withdrawing again due to tax implications.
However, there are other people who don’t care how much they get taxed as long as they get the money, and that’s where the concern stems from.
Manyike stressed that a retirement fund’s purpose is to help you replace your salary when you retire, aiming to provide at least 70% of your final paycheck to maintain your living standard.
But with the current withdrawal trends, he warned that some people will end up with a monthly annuity from their retirement funds that’s even less than what people are getting from the government.
This is especially risky as life expectancy in South Africa is increasing, meaning savings must last longer.
Another ticking time bomb
Some retirees might still have debts, from bonds and car loans to funding children’s tertiary education, making it even harder to maintain their lifestyle.
“If you don’t save enough, you’re actually going to downgrade in terms of the quality of life,” Manyike said.
To address this, Manyike believes there must be greater awareness of the long‑term consequences of early withdrawals.
“It certainly requires some level of collaboration between employers by opening their doors to the fund members so that they actually conduct member education with their employees,” he said.
This education should be made available regardless of which fund people belong to. Manyike also sees this as a mathematical problem where people may not fully understand the compounding impact of reducing their retirement savings early.
Old Mutual ran a survey to understand withdrawal motivations. 45% of respondents said they withdrew to pay off debt, 18% to cover school fees, and 11% to pay their bond.
“The question is, is that an emergency. While some argued that receiving letters of demand qualified as urgent, Manyike noted that the system was not designed to be used for debt repayments.
Another issue of concern for Manyike is the “ticking time bomb” of youth unemployment, which he said poses serious risks for the future.
South Africa recorded an unemployment rate of 32.9% in the first quarter, with youth unemployment sitting at 46.1%. The economy has not been able to create as many jobs to absorb the youth.
The problem with this is that if young people enter the labour market very late, they will find it difficult to save adequately for retirement. This, he warned, would lead to the highest degree of dependency on the state, which is bad news for everybody.
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