The two-pot retirement system implemented in September 2024 is widely considered a progressive regulatory reform that will deliver long-term benefits for retirement savers and the investment sector.
However, with withdrawals exceeding all expectations and opportunities for savers to draw on funds every new financial year, the new system will have far-reaching implications.
By the end of January 2025, the South African Revenue Service (Sars) had received 2,664,279 applications for tax directives, with R43.42bn paid out.
From an industry perspective, Phil Le Feuvre, member of the South African Reward Association, says Sars data shows the retirement industry is experiencing net outflows due to two-pot withdrawals.
“However, due to asset growth and annual contributions the industry has remained almost unchanged.”
While it would take about 10 years for withdrawals to deplete the vested component, Le Feuvre expects the magnitude of annual net outflows to gradually dwindle and for the industry to reach a new equilibrium.
Mosili Lepheana, head of the postgraduate diploma in financial planning at Stellenbosch Business School, cautions: “Among savers, increasing withdrawals will continue to threaten retirement saving adequacy.”
Lepheana says the replacement ratio — the percentage of pre-retirement income a saver needs to replace with retirement income to maintain their current standard of living — will remain an issue.
“As more members make withdrawals, they will continue to struggle to get a replacement ratio above 50%.”
A concern is that the majority of retirement fund members withdrawing from their savings components are lower-income earners.
According to data released by the Financial Sector Conduct Authority, members with an annual pensionable salary of R180,000-R239,988 and R60,000-R119,988 made the most withdrawals. Higher-income earners with a pensionable salary above R600,000 made fewer withdrawals.
Allan Gray head of tax Carla Rossouw says: “It is a good idea to consider replenishing funds withdrawn from the savings component of your retirement fund before the end of the tax year to restore your position.
“Savers can take comfort in knowing they can access the savings component once a tax year if needed. However, the fact that you can does not mean you should. Do not view withdrawals as a mandatory annual event.”
Rossouw says retirement savers must understand that the balance in their savings component is generally all they can draw on as cash at retirement.
“You cannot access any portion of your retirement component as cash — the full amount must be used to purchase a retirement income product, such as a living annuity or a guaranteed annuity.”
Given this provision in the two-pot system, Rossouw says that anyone who needs to access cash from their retirement fund at retirement to pay off a home loan, for example, will need the required amount available in their savings component.
“This is why replenishing withdrawals could be a good option, but it is important to understand how future contributions will be treated.”
Rossouw explains that additional contributions are split, with two-thirds allocated to the retirement component and one-third to the savings component.
“You will need to contribute a sum three times larger than your original withdrawal to fully replenish your savings component. You also lose out on any investment growth between the withdrawal and replacement dates.”
As more members make withdrawals, they will continue to struggle to get a replacement ratio above 50%
— Mosili Lepheana
Though the system provides members with much-needed financial relief, Rossouw says it is important to obtain advice from a qualified adviser for a clear understanding of the impact a withdrawal will have on your retirement outcome.
“Advice conversations should emphasise the dual purpose of the system, namely providing access to savings for financial emergencies and ensuring the bulk of the member’s savings is preserved for retirement.”
As the two-pot system becomes intertwined into the fabric of South Africa’s retirement industry, Lepheana says the role of financial planners will shift towards assisting clients with their financial behaviour, with greater emphasis on self-discipline to avoid shortfalls at retirement.
“A concern is that people will focus less on proper financial management as they will always have a backup plan in the savings component.”
Lepheana cites overindebtedness as a primary reason why people are unable to save adequately for retirement.
“The need to pay down debt will likely prompt members to continue withdrawing from their retirement savings.”
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.