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South Africa’s two-pot retirement system offers relief in emergencies, but every withdrawal can erode future security. MOHAMED JAFFER explains why access to savings today must be weighed carefully against financial security in retirement.
The real question is not whether you can withdraw money from your retirement fund. The real question is whether you should.
The new system was introduced to solve a growing problem. For years, thousands of South Africans resigned from their jobs simply to gain access to their retirement savings. Faced with mounting debt, rising living costs and unexpected financial emergencies, many saw resignation as the only way to access their money. Unfortunately, this came at a terrible price. Every withdrawal reduced their retirement savings, leaving many with little or nothing when they eventually stopped working. This has contributed significantly to the growing number of pensioners who reach retirement financially vulnerable and dependent on family members or the government’s old-age grant.
Recognising this challenge, the government worked with retirement funds, financial institutions and industry stakeholders to create a system that balances immediate financial needs with long-term retirement security.
Ironically, what we commonly call the ‘two-pot system’ is actually a three-pot system.
On September 1, 2024, existing retirement savings were divided according to specific rules, with a once-off amount transferred to the savings pot. Members older than 55 had the option to opt out and not participate in the two-pot system:
- On September 1, 2024, 10 per cent of your existing pension or provident fund savings, limited to R30 000, was transferred to the savings pot. The balance remained in the vesting pot. Any retirement savings accumulated before September 1, 2024, less the seed-capital transfer, continue under the old rules.
After September 1, 2024, every new retirement contribution is divided as follows. Consider a monthly contribution of R900:
- Savings component: One-third is allocated to this pot. In our example, this is R300.
- Retirement component: Two-thirds is allocated to this pot. In our example, this is R600.
The savings component is the portion that members may access before retirement, once a year, provided they meet the minimum withdrawal requirement of R2 000. This gives individuals access to emergency funds without having to resign from employment. The withdrawal will be taxed at your current tax rate.
The retirement component is strictly preserved until retirement. It cannot be accessed before retirement, except under very limited circumstances prescribed by law. This ensures that a meaningful portion of your retirement savings remains intact to provide income during your retirement years.
At first glance, the ability to withdraw money from your savings component may seem like an excellent idea. Life is unpredictable. Medical emergencies arise, vehicles break down, children need school fees paid and unexpected expenses often arrive at the worst possible time.
In genuine emergencies, the savings component can provide valuable financial relief.
The danger lies in treating it as an annual bonus or an extra source of spending money.
Every rand withdrawn today is a rand that no longer benefits from years of investment growth. Retirement investing relies heavily on compound growth – the process in which your investment earns returns and those returns generate further returns over many years. This compounding effect is often referred to as the eighth wonder of the world because of the remarkable difference time can make.
Consider a simple example. Suppose you withdraw R30 000 today because you would like to renovate your home, pay for a holiday or settle short-term debt. While R30 000 may not seem like a substantial amount, invested over the next 25 years, it could potentially grow to well over R230 603, depending on investment returns.
Now imagine making similar withdrawals every few years.
What starts as ‘just this once’ gradually becomes a habit. Each withdrawal reduces the capital available to grow, leaving you with a significantly smaller retirement fund than you might have expected.
Many people focus on the immediate benefit but fail to appreciate the long-term cost.
There is another important consideration. The savings component is not tax-free. Withdrawals are taxed at your marginal income tax rate, meaning the South African Revenue Service (SARS) may take a significant portion of your withdrawal, depending on your taxable income. In addition, retirement funds may deduct any outstanding tax owed to SARS before paying the benefit.
This means you could receive considerably less than the amount you requested. Some retirement funds may also charge a withdrawal fee.
Before making a withdrawal, ask yourself three important questions:
- Is this a genuine emergency or simply something I would like to buy?
- Have I exhausted other financial options first?
- Will withdrawing today negatively affect my financial independence at retirement?
If the answer to the first question is ‘no’, it may be wiser to leave your retirement savings untouched.
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The true purpose of retirement savings is not to solve today’s spending challenges. It is to provide tomorrow’s income when your salary eventually stops.
The two-pot retirement system offers flexibility, but with flexibility comes responsibility. Used wisely, it can provide meaningful assistance during genuine financial crises. Used carelessly, it may leave many South Africans facing financial hardship in retirement.
Your retirement fund represents decades of hard work, sacrifice and disciplined saving. Protect it whenever you can.
While today’s financial emergency may last a few weeks, retirement could last 25 to 30 years. The decisions you make today will determine whether those years are lived with financial dignity or financial dependence.
Your retirement fund is not simply an investment – it is your future salary. Think carefully before spending tomorrow’s income on today’s wants.
Mohamed Jaffer is the founder and principal financial planner at Mojaff Financial Services and Mojaff Legacy. A former analytical chemist, corporate business planner and business manager, he holds a B.Compt and postgraduate qualifications in financial planning, estate planning and risk management. Jaffer is currently completing an Advanced Diploma in Estates and Trust Administration.
