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Win-win: The proposed two-pot retirement saving system balances flexibility with preservation

As of 1 March 2023, if all goes according to plan, members of retirement funds in South Africa will be able to withdraw a portion of the money they have saved in their fund should they need that money for any reason.

The so-called two-pot system will see one third of the money you invest in your retirement fund being placed in an accessible savings pot, while the remaining two thirds of your contributions will be held in a retirement pot, which you will not be able to access until the day you retire.

According to Samukelo Zwane, Head of Product Development at FNB Wealth and Investments, the introduction of the two-pot system is a significant step forward for South Africa’s retirement laws and it will help to create a good balance between preservation and flexibility.

“Currently, only about 10% of retirement fund members preserve their retirement savings when they change employers, most choose to access and spend some or all of these vital retirement funds instead,” Zwane explains, “and this has been a significant contributing factor to the troubling statistic that less than 10% of people in this country are in a position to retire comfortably.”

He points out that the new two-pot system will effectively ring fence two thirds of the money you have saved for retirement and ensure that you leave those savings intact when you change jobs or leave your fund. He says that this means there is a better chance that you will eventually have at least some of the money you need to retire with more financial security.

“The money placed into your retirement pot can only be used to purchase an annuity that will pay you an income in retirement,” Zwane explains, “which means that this retirement reform will increase the levels of preservation in the country and put far more retirement fund members on a path to a better retirement.”

At the same time, the introduction of the accessible savings pot portion makes it possible for people to access at least some of their retirement savings if they find themselves in a situation where they need money urgently and have no other way of acquiring it.

“The need for this type of flexibility to be built into retirement funds was highlighted during Covid-19, when the lockdowns put many people in a difficult financial situation,” Zwane says. “Many of those who were struggling to make ends meet every month actually had money saved in their retirement funds, but couldn’t access it, which led to the untenable situation in which we saw a lot of people making the poor long-term decision to resign from their jobs, just to be able to access a short-term financial solution by withdrawing their retirement savings.”

He explains that the two-pot system will help to prevent this situation going forward because people who lose their jobs or find themselves in a financial emergency will be able to access some of their retirement savings without decimating their entire retirement plan.

“Of course, it’s important to note that the proposal by Treasury outlines that any amounts withdrawn from the savings pot will be included in the member’s taxable income for that tax year and will be taxed at their relevant marginal rate,” he says, “so it’s important that fund members only consider accessing their savings pots if they have no other option. So, for example, don’t use your retirement savings to fund a family holiday.”

Zwane also emphasises that withdrawing money from your retirement fund, even when you are allowed to do so, is not always the best move to make if you want to retire comfortably. “Even if you make a concerted effort, it’s unlikely that you will ever be able to fully replace the money you withdraw by the time you retire,” he explains, “which means that any money you take out of your fund today, could impact on the quality of retirement you enjoy in the future.”

While Zwane is optimistic about the potential that the new two-pot system presents for improved preservation rates amongst South African retirement fund members, he says that there also needs to be a far greater focus on educating fund members about the importance of starting early with their retirement savings and preserving their retirement savings until they retire to take full advantage of the power of compounding.

“We need to shift people’s mindsets about retirement and equip them with the knowledge they need to practice good money management in all areas of their lives,” he says, “and that includes also trying to save as much as they can outside of their retirement fund, so that they don’t need to tap into their retirement fund in a financial emergency, and that money can stay invested and continue to grow for their eventual retirement needs.”

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