Storm in a two-pot

As South Africa readies to implement the much-debated two-pot retirement system next month, it has sparked a fierce debate among labour unions, financial experts and the government.

While the South African Federation of Trade Unions (Saftu) condemned the system as a “scam” that threatens workers’ financial security, financial professionals said it offers a balanced approach to addressing immediate financial needs and long-term retirement goals.

Saftu general secretary Zwelinzima Vavi said it undermined workers’ demands for greater access to their pension funds before retirement.

“Many workers face financial hardships and emergencies be- fore reaching retirement age and the ability to access a portion of their pension savings can provide much-needed relief.”

But Vavi said this was a betray- al of workers’ needs and a tool for capitalists to exploit pension funds for investment purposes.

“The rules applicable to the second pot dilute the much-needed pension reform enabling workers to access a portion of their pensions before retirement.

“The system locks away two- thirds of pensions from workers until they retire, which is not the reform that workers called for.”

Financial experts defend the system

Blessing Utete, managing executive at Old Mutual Corporate Consultants, said the system was designed to protect long-term financial security, while offering flexibility for immediate needs.

He said the system prevented workers from withdrawing all their retirement savings when they changed jobs. “Even if you do take some money out for short-term emergency needs, most of your retirement savings will remain untouched and continue to grow,” he said.

“This means even with partial withdrawals, you’ll be significantly better off at retirement compared to the old system, where people would often with- draw all of their savings when switching jobs.”

ALSO READ: Two-pot retirement system: Draw from your savings pot or get a loan?

Potential risks and tax implications

Political economist Khaya Sithole said the potential financial impact of early withdrawals under the two-pot system allowed for an emergency access to funds.

He said withdrawing funds from the savings pot disrupts the benefits of compound interest, which can only be corrected by increasing future savings.

“Individuals who make withdrawals in response to emergency needs will be able to address those needs, but this will come at the cost of significant erosion to their savings,” he warned.

Sithole stressed the tax implications of the system and said withdrawals would be added to an individual’s taxable income, potentially pushing them into a higher tax bracket.

“If an individual is on a 25% tax rate, then the net amount they can expect to receive is only 75% of their withdrawal.”