By Ina Opperman
Consumers who cash out their retirement savings will never catch up and will not be able to retire at the same standard of living.
The two-pot retirement system can help 70% of South African workers save for retirement as limited access to only a portion of their pension savings will allow more members to enjoy a comfortable retirement.
More and more workers are unable to preserve their retirement funds according to the latest 2023 Old Mutual Savings and Investment Monitor Survey, while South Africa’s retirement savings crisis has reached a critical point already, with a recent Debt Rescue survey finding that consumers are now more scared of retirement than they are of dying.
In response to this growing retirement crisis, the South African government proposed a retirement reform aptly named Two-Pot, a new system that promises to provide a sustainable and practical means for South Africans to balance managing immediate financial needs and long-term retirement planning.
However, its ultimate success will depend on individual discipline and comprehensive financial education, says Michelle Acton, retirement reform executive at Old Mutual.
Two-pot retirement system: How it works
She says set for implementation on 1 March 2024, this system at its core requires that every pension fund member saves two-thirds of their future contributions in a “retirement pot” specifically for income at retirement.
The balance of the contributions will be allocated to a “savings pot”, which is specifically meant for a lump sum at retirement but members can access it before retirement, subject to some limitations. It is a convenience that comes with risks.
Acton says this means that for every R100 a member contributes, R66.67 will be added to a “retirement pot”, which cannot be accessed until retirement and the remaining R33.33 into a “savings pot” that can be withdrawn once a year.
Any savings pot balance left over before retirement can be taken as a lump sum at retirement.
Two-pot system will prevent cashing out retirement funds
“The rationale is simple. When most South Africans leave a job due to retrenchment, termination, or resignation, they typically withdraw their retirement savings instead of transferring it to a new employer or putting it in a preservation fund.
“The 2023 Old Mutual Savings and Investment Monitor confirmed this disconcerting trend of early withdrawals.”
With a sample size of just over 1 500 participants, the survey showed that less than a third (29%) saved all their retirement money when they left their employer. Approximately 1 in 3 people decided to cash out all their retirement savings.
Acton says this trend is worrying as it could mean these individuals may not have enough money for a comfortable retirement.
The survey also revealed that 62% of participants with retirement funds would likely use some of their retirement money before they retire if the rules allowed it and Acton says these findings highlight the importance of the Two-Pot reform, a change designed to help people plan their retirement savings more responsibly.
Under the Two-Pot system, retirement fund members who need money can withdraw some of their accessible cash pot before retirement without quitting or resigning from their jobs.
A maximum of 10%, capped at R25 000, of your existing savings will be used to seed the savings pot on day one from existing retirement savings and the minimum withdrawal amount from the savings pot is R2 000, with no maximum amount.
If you have, for example, a total of R100 000 in your retirement fund, 10% or R10 000 will be transferred into an accessible “savings pot” when the system starts and you can withdraw a minimum of R2 000 or the entire amount in the savings pot.
However, Acton warns consumers to keep economic challenges in mind before making any plans.
“Economic factors such as inflation, interest rates and overall market performance could influence the growth and value of retirement savings in both pots.
“Beyond this, unfavourable economic conditions, such as recessions or job losses, drive more people to access their savings prematurely, affecting long-term retirement security.”
Click here to read the full article: https://www.citizen.co.za/business/personal-finance/what-two-pot-retirement-systemsavings/
