The two-pot system creates the impression that your retirement pot holds what you are saving for your retirement.
But often retirement fund members need the money in both pots to secure a reasonable pension.
In this video, we unpack how your retirement savings are intended to get you to a targeted pension and why you may want to change your ideas about how to use the money in your savings pot.
This video also available on YouTube.
Or you can read the transcript below.
(Full transcript)
The two-pot retirement system will split retirement savings made from 1 September 2024 into two pots.
The savings pot holds your future cash at retirement which you can access before retirement - if you absolutely need to.
The retirement pot holds your future income - you must use this money to buy a monthly pension or annuity when you retire.
If you raid your savings pot before retirement and do not make any plans to replace that money … you give up having a stash of cash at retirement. Having cash at retirement gives you options as you may need a lump sum to, for example, fund medical needs.
Think about your pension
Be careful, however, about thinking about using only your retirement pot to provide the pension you are hoping for.
Your retirement savings are set up to get you to a targeted savings amount. That sum should provide you with a pension to replaces the income you were earning before retirement.
Typically, your retirement fund trustees aim for your savings to get you to a pension that is equal to about 60 to 75% of your income before retirement.
Your savings are targeted to provide a pension that is often expressed as a percentage of your salary or income before retirement. This is known as your replacement ratio as it replaces your income.
If you only preserve your retirement pot until retirement and use up your savings pot, you reduce how much you save and for how long, and the result is your income replacement ratio will be lower.
You could be in for a nasty shock at retirement if you have also withdrawn from your vested pot – the savings you made before the two-pot system was introduced.
Withdrawing savings during your working years is the reason why so few people reach retirement with enough savings to buy a reasonable pension relative to what they were earning before retirement.
Withdrawals mess with the magic formula that is meant to get you to the targeted income.
But retirement is so far away
But I’m a long way from retirement – I have time to replace the money I withdrew from my savings pot
Be careful: saving early in your working life gives you the benefit of compound interest – it does a lot of the heavy lifting for you.
For example:
You are 28 and earning R30 000 a month.
If you take R15 000 out of your savings pot now you would probably only get about R10 000 after tax.
If you don’t replace that R15 000 soon after, by the time you reach 65, your retirement savings could be off the target by as much as R500 000.
And this R500 000 could make a big difference to the pension you could draw for the rest of your years.
The longer you wait, the harder it will be to replace that amount as it will grow over time.
Act quickly to catch up
However, if you do borrow from your future self by withdrawing from the savings pot, and you immediately start to repay yourself by increasing your contributions to your retirement fund, you can recover.
If you took R15 000 at age 28 and increased your retirement contributions by R76 a month for the rest of your working life, you could get back on track.
The more you contribute, the greater the tax deduction you will enjoy. This is how you can also recoup the tax you paid on your withdrawal.
Remember
Remember to only withdraw if you really need to. Your retirement savings is for retirement.
If you do need to withdraw, get some help from your financial adviser or retirement benefits counsellor to work out how to get back on track as quickly as possible. Don’t let the money you borrow now from your future self make a big hole in your retirement income.
