The Two-Pot Retirement System: Are You Robbing Your Future Self?

The recently implemented two-pot retirement system has introduced new flexibility for South Africans, allowing individuals to withdraw from their retirement savings pot under certain conditions. However the two pot retirement withdrawal implication, this newfound flexibility comes with significant financial consequences.

According to an article by the Sowetan yesterday, Alexander Forbes, one of South Africa's major retirement fund administrators, by Monday 9th September 2024, they had already processed 78,000 claims worth R1.5 billion. Of this, an estimated R270 million will be paid to the South African Revenue Service (SARS) in taxes. This is a striking figure, especially since it's only from one administrator—imagine the amounts being withdrawn across other administrators and life companies.

The Hidden Costs of Early Withdrawals

While the ability to access retirement savings may relieve financial pressure in the short term, it's crucial to consider the long-term impact of such withdrawals. Only 6% of South Africans have enough saved to retire comfortably. By tapping into retirement funds now, many individuals are undermining their future financial security.

Here are three important points to consider before making a withdrawal:

1. Withdrawals Are Taxed:

   Any money drawn from the "savings" pot is subject to taxation.

2. Average Tax Rate Applies:

   The tax payable on your withdrawal will be based on your average income tax rate.

3. Outstanding Liabilities:

   If you have any outstanding tax liabilities, SARS will settle those first before you receive your payout. Always ensure your tax affairs are in order before making a claim.

   
   

Case Study: The Long-Term Impact of Withdrawals

Let’s consider a practical example to illustrate the financial consequences of withdrawing from your retirement savings early:

Anne is a 35-year-old administrator with R178,000 in her retirement annuity (RA). On 1 September 2024, her "savings" pot contains R17,800. Although her financial situation isn't dire, she decides to withdraw the money to settle some small accounts.

After submitting the required documents, Anne is paid out approximately R13,884, with R3,916 deducted in taxes.

If Anne had left the R17,800 in her RA until the age of 60, it could have grown to around R192,858.

If she kept it until the age of 65, it could have reached R310,599.

The long-term growth far outweighs the immediate benefit of the withdrawal, highlighting the importance of resisting short-term urges.

*note that tis is an example, and does not constitute financial advice in any way or form.

Think About Your Future Self

If you’re considering a withdrawal from your retirement fund, it’s important to think about the compounding impact of your decision. As you can see from Anne’s example, regular withdrawals can significantly reduce your retirement savings, potentially leaving you in a precarious financial position later in life.

If you’re unsure or have questions about the two-pot retirement system, speak to a financial planning professional. Don’t let your current needs rob your future self of financial security.