South Africa’s new two-pot retirement system will go live at the beginning of September, but Allan Gray says members should not consider it an emergency fund.<\/p>\n\n\n\n
The group recommends that savers avoid touching their long-term investments and instead focus on building an actual emergency fund that they can turn to in times of need – without the risk of running through one-third of their retirement savings.<\/p>\n\n\n\n
The new system, which has been established as an answer to the financial difficulties many South Africans hit during the Covid-19 pandemic, will ultimately be set up with a ‘savings’ and ‘retirement’ pot.<\/p>\n\n\n\n
The savings pot will hold one-third of all retirement savings from the implementation date and will be accessible once a year before retirement. <\/p>\n\n\n\n
The remaining two-thirds will be allocated to a retirement pot, which will be inaccessible before a member retires. The funds at retirement will then be used to purchase a retirement income product.<\/p>\n\n\n\n
Existing retirement savings will go into a ‘vested’ pot and will follow existing rules. <\/p>\n\n\n\n
“While access to the savings component will be a welcome relief to those in dire need, as a retirement fund member, it is vital to be mindful of the unintended consequence of unnecessary early access, which can prevent you from reaching your long-term investment goals,” said Allan Gray’s Tebogo Marite. <\/p>\n\n\n\n
“Your retirement savings are intended for a very specific purpose: funding your income in retirement.”<\/p>\n\n\n\n
“Despite getting access to a component for emergencies, it is important to guard against thinking of your savings component as your emergency fund. Depleting your savings component annually will result in you having one-third less on which to retire<\/strong>.”<\/p>\n\n\n\n Although the new system was created with emergencies in mind, such as the Covid-19 pandemic, Marite said that a separate emergency fund should be created. It should aim to hold at least three times one’s monthly salary. <\/p>\n\n\n\n She recommended investing the emergency fund in a low-risk unit trust. <\/p>\n\n\n\n She added that building a healthy emergency fund will take some effort, including lifestyle adjustments, such as paying off an expensive credit card and a monthly budget.<\/p>\n\n\n\n She said that R4,167 should be set aside for 18 months to accumulate R75,000 for those who earn R25,000 after tax. <\/p>\n\n\n\n “Ultimately, you should aim for your emergency fund to be sufficiently sized to buy you enough time to manage and recover from a crisis without the need to dip into your long-term investments,” said Marite.<\/p>\n\n\n\n “It is not prudent to rely on long-term investments \u2013 including the soon-to-be accessible savings component of your retirement funds \u2013 as they are specifically intended to meet long-term goals and are typically invested accordingly, with relatively high equity exposure.”<\/p>\n\n\n\n