Warning over the two-pot retirement system in South Africa
The two-pot retirement system has been live for two years, but a risk remains that South Africans will view their nest eggs as ordinary savings rather than long-term investments.
The two-pot retirement system launched in 2024 and introduced a retirement and a savings pot, with the latter accessible before retirement.
The retirement pot, which must hold at least two-thirds of all retirement savings, will be accessible only upon retirement.
Thys van Zyl, Chief Executive Officer of Everest Advisory Services, said that much of the debate surrounding the two-pot system has focused on the wrong issue.
Van Zyl said that the system was introduced to address the practical challenges faced by many retirement fund members.
Many had previously had limited access to their retirement savings without requiring them to resign to unlock their pension benefits.
“The real risk emerges when retirement savings are viewed as an easy source of cash rather than money specifically set aside to fund retirement,” said Van Zyl.
Van Zyl says the system was designed to strike a balance between short-term financial pressure and long-term retirement planning.
“For many households, the savings component provides much-needed financial relief when unexpected expenses arise,” he added.
“That does not mean, however, that every withdrawal is a sound financial decision. Every time money is withdrawn, that capital potentially loses the opportunity to generate compound growth over many years.”
Not just one withdrawal
Van Zyl said the greatest risk is not a single large withdrawal but rather a series of smaller withdrawals over time.
While many people assume that small withdrawals make little difference, repeated withdrawals can have a major impact on one’s eventual retirement savings over several decades.
“Financial security is rarely destroyed by one major decision; it is more often gradually eroded by many small decisions made over the course of years,” said Van Zyl.
The long-term consequences facing South Africans can be seen in foreign markets, most notably in Chile.
During the COVID-19 pandemic, Chilean workers were allowed to withdraw substantial amounts from their pension funds to ease financial hardship.
Van Zyl noted that millions of Chileans had depleted a significant portion of their retirement savings and that future pension income had declined considerably.
The South American country’s government was then forced to provide greater financial support to retirees.
Van Zyl warned that the impact of compound growth is often understated, with every withdrawal not just taking that money out but also all future growth it could have generated.
He said that individuals approaching retirement age should carefully consider the long-term impact of their withdrawals.
“Many South Africans in this age group have already lost retirement savings during their working lives due to changing jobs, difficult economic circumstances or interruptions in contributions,” he said.
“They simply have less time to recover those losses through compound growth. Every additional withdrawal can therefore have a far greater impact on their financial security in retirement.”
He said that South Africa needs to place greater emphasis on financial literacy, stronger incentives to preserve retirement savings, and policies that encourage people to save more for retirement.
“The objective is not to deny people access to their savings, but to ensure that short-term financial relief does not ultimately create long-term financial insecurity.”
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