The Basics of the Two-Pot System
- Purpose: The main goal is encouraging people to preserve their retirement funds. A new “Savings Pot” will be added to your retirement fund, allowing one annual withdrawal (with a minimum of R2,000).
- Implementation: As of 31 August 2024, your retirement fund’s current value will “vest,” meaning it keeps all the existing benefits. Ten percent of this vested value (limited to R30,000) will be allocated to the new Savings Pot.
- Contribution Split: Starting 1 September 2024, your retirement contributions will be divided: one-third goes into the Savings Pot, and two-thirds into a new Retirement Pot. The Retirement Pot is locked until you retire and must be used to purchase an annuity, while the Savings Pot is accessible for annual withdrawals or as a lump sum at retirement.
Risk of Easy Access
While this new system might seem like a smart way to keep people from spending their retirement savings when they change jobs or resign, it also opens the door to new risks. With easy access to a portion of your retirement fund (whether you’re changing jobs or not), there’s a temptation to dip into it for short-term needs, which could seriously damage your long-term financial health.
Let’s take Jane Smith as an example. Jane is 47 years old, has R3 million in her retirement fund, and contributes R10,000 monthly. Assuming her investment grows at 10% annually, by the time she retires at 65, her fund could be worth around R8.8 million (in today’s money, with 6% inflation). However, if Jane decides to withdraw one-third of her annual contributions each year, her retirement fund could end up nearly R1 million less—costing her years of income during retirement.
Why It’s Hard to Say No
You might think, “I won’t access my funds before retirement,” but life isn’t always that simple. Times are tough, and juggling rising bond payments, school fees, and the ever-growing cost of living is exceptionally challenging. Incomes have remained mostly stagnant while inflation continues to climb, and with increasing financial pressures, the idea of using your Savings Pot to pay for your child’s education or clear some debt might seem like a good idea. But, the problem is that we justify our financial decisions using mental mathematics instead of assessing the real numbers. What feels like a smart move now could leave you financially short in the future, especially if you fall into the trap of making repeated withdrawals.
The Emotions Behind Money Decisions
When it comes to money, emotions can easily cloud our judgment. We often believe we’ll make up for a withdrawal later, but the reality is that we tend to repeat the same patterns. As our incomes grow, so do our lifestyles, making it easy to forget the financial compromises we once made.
Stress, anxiety, and fear can lead to irrational decisions. Imagine carrying a large outstanding balance on your credit card. Knowing you have access to a portion of your retirement savings, you might feel justified in using that money to pay off debt. When you do, you experience immediate emotional relief. The problem is our lifestyles are often anchored to our habits, and before you know it, that credit card balance creeps back up, bringing the same stress along with it. It’s easy to fall into the trap of thinking one small withdrawal won’t matter, but the reality is that it often leads to multiple withdrawals, compounding the problem over time.
Tax Considerations
Withdrawing from the Savings Pot is a taxable event. The money you take out will be taxed at your marginal rate, which is likely at its highest during midlife. This means you’re not just reducing your future retirement savings but also paying a significant amount in taxes.
Making the Two-Pot System Work for You
The Two-Pot System is well-intentioned, but it comes with potential pitfalls. To protect your financial future, consider working with a qualified financial planner who can help you navigate these changes and keep you on track. Remember, achieving financial freedom isn’t about quick fixes or basing decisions on fear and worry. It’s about changing your behaviour and ensuring that your financial habits support your long-term plan. A solid financial plan and a person to keep you accountable to the planning is a great starting point.
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