Say no to (savings) pot

South Africa's two-pot retirement system came into effect on 1 September 2024. The two-pot system divides retirement contributions into two pots: a retirement pot and a savings pot. While this system offers greater flexibility, it also presents a significant downside for retirement fund members who are not careful when it comes to accessing their savings.

The retirement pot is designed to be a long-term savings vehicle that must be used to purchase an income in retirement.

From September 2024, two-thirds of your monthly retirement contributions will be allocated to this pot.  

The savings pot, on the other hand, can be accessed once a tax year from 1 September 2024. An initial seeding amount (the lower of 10% or R30 000), plus one third of your monthly contributions will make up the value of your savings pot.

Withdrawing from your savings pot before retirement, however, will have significant consequences for long-term financial security.

The savings pot dangers

The biggest danger of accessing your savings pot before retirement is that you erode your retirement savings. Early withdrawals reduce the overall value of your retirement savings, which will have a significant impact on future retirement income.

THE IMPACT OF A SINGLE WITHDRAWAL
	Sam	Sam's bestie
Retirement savings on 1 September 2024	R1 000 000	R1 000 000
Savings pot on 1 September 2024	R30 000	R30 000
Withdrawal September 2024	-R0	-R30 000
Retirement savings on 1 September 2059	R28 102 437	R27 259 364
Savings difference	R843 000  or R153 000 in today's rands

Let’s consider an example to illustrate this. Sam and Sam’s bestie both have R1 million in their retirement annuity (RA) funds. On 1 September 2024, Sam’s bestie decides to withdraw the full balance of her savings pot (a value of R30 000).

Sam avoids the temptation to withdraw from her savings pot and leaves her RA fund to grow until her retirement.

Fast-forward to 35 years later, when Sam and her bestie reach retirement age. Sam’s RA will be worth R28.1 million. Sam’s bestie’s retirement annuity will be worth R27.2 million – R843 000 less (or approximately R153 000 in today’s terms, assuming an inflation rate of 5%)

Ongoing access multiplies the dangers

Now, let’s assume that Sam and her bestie both start working at the age of 22. Sam and her bestie both contribute R6 000 a month towards their pension funds. However, Sam’s bestie withdraws one third of her contributions (the savings pot component) every year.

THE IMPACT OF ONGOING WITHDRAWALS
	Sam	Sam's bestie
Contributions from age 22	R6 000	R6 000
Withdrawals	-R0	Full savings balance once a year
Retirement savings at age 65	R44 574 135	R29 716 090
Savings difference	R14 900 000 or R1 828 000 in today's rands

When they reach retirement at age 65, Sam’s pension fund will be worth R44.5 million, while Sam’s bestie will have a pension fund of R29.7 million – a staggering difference of almost R14.9 million (or R1 828 000 in today’s terms)!

Moreover, withdrawals from your savings pot also have severe tax implications. Let’s assume that Sam’s bestie earns R50 000 a month and needs access to her savings pot of R30 000. While she may have access to the full amount, she will only receive approximately R19 200 – with the balance of R10 800 going to the tax man.

How to avoid accessing the savings pot:

To avoid the pitfalls of accessing your savings pot before retirement, investors should consider the following strategies:

Create a robust emergency fund: Ensure that you have an emergency fund equal to three to six months’ worth of living expenses, in an account that pays high interest, and that is also easily accessible. Do not treat your savings pot as an emergency fund!

Maximise contributions to your retirement funds: Contribute as much as possible to your retirement funds – this will provide you with a substantial tax benefit, while also helping you put money away for your old age.

Seek professional advice: A suitably qualified adviser, such as one who holds the Certified Financial Planner accreditation, can help you navigate the complexities of the two-pot retirement system and develop your personal strategy.

While the two-pot retirement system offers increased flexibility, it is essential to approach it with caution. Withdrawals from your savings pot will have significant negative consequences for your long-term financial security.

If you understand the risks and adopt a sound financial plan, you can maximise the benefits of the two-pot system and ensure a comfortable retirement.