The new Two Pot Retirement System can bring negative impact for South Africans once they are not saving enough towards retirement!
The new Two Pot Retirement System is set to give relief to financially struggling South Africans by allowing them to access a portion of their retirement savings early. This means they can get some money before they retire. But that can be a slippery slope, once they are not saving enough money towrds retirement.
In February 2024, parliament gave the green light to the Pension Funds Amendments Bill, which, if signed into law by President Cyril Ramaphosa, will allow workers to take out a one-third of their retirement funds before retirement.
The retirement part will keep two-thirds of your retirement savings safe until you retire. You can only use it when you retire. Before September 1, 2024, there will be another part that holds most of your retirement savings (except for the 10% or R30,000 used to start saving).
Many people think this will help workers, especially those struggling with debt. But some are worried. Neil Roets, CEO of Debt Rescue, says that while the early access can help in emergencies, it might hurt retirement funds in the long run. Taking out a big chunk of retirement savings early could mean less money later when they need it most.
”Most South Africans already cannot put away enough money to sustain them through their golden years. Withdrawing a full third of their retirement fund before retirement age will substantially diminish their portfolio – severely impacting the compounded interest thereafter – leaving them with far less to survive on in later years”, said Roets.
And he is not wrong. According to the latest Baseline Survey by the Financial Sector Conduct Authority (FSCA), 46% of South Africans tend to spend money now instead of saving for the future. Roets emphasizes it’s important for South Africans to understand the new rules before making any withdrawals, due to the lack of savings.
He also said that “approaching the withdrawal option as a source of liquidity and funding during difficult times – and these are indeed difficult times – may very well undo all the years of saving for the retirement years, leaving workers vastly more dependent on a government pension or their relatives”.
A survey found that 59% of the people that took part in it feel unprepared for retirement, whilst only 4% feels completely prepared for it. So, for those who end up taking out a portion of their retirement fund to pay off debt, Roest suggests they should invest the rest in a savings fund that will build interest over the upcoming years.
“As of the end of 2023, South African households had close to R2 trillion in outstanding debt, with R25.8 billion in default. Understandably, the early withdrawal option from the retirement fund can offer a possible short-term solution to their financial predicament. However, this needs to be mitigated in some way to ensure that there is enough money in the fund come retirement age. My advice to South Africans who can still put money away towards a retirement fund – or through their employer’s fund – is to keep the big picture in mind”, said Roets.
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