Two-pot retirement system: not a quick fix for financial freedom

Although the implementation of the two-pot retirement system seems like manna from heaven for cash-strapped consumers, insurance providers and financial institutions worry about its impact on consumers’ short-term and long-term decision-making.

Mark Sanders, COO of GIB Insurance Brokers and Glenn Gamsy, MD of financial services at GIB, say while the two-pot retirement system offers much-needed relief amid the widespread financial uncertainty, high cost of living and mounting debt in South Africa, there is reason for concern among insurance providers and financial institutions.

Now more than ever, Sanders says consumers must take a strategic approach to their financial planning, particularly when it comes to insurance.

“Since the implementation of the two-pot retirement system in September, financial services providers already received claims totalling over R21 billion. While it is understandable that many consumers are prioritising short-term financial pressures, this can lead to decisions that may compromise their long-term financial security,” Gamsy says.

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Two-pot retirement funds not for short-term problems

Sanders warns that although using money from the savings pot as a fallback for emergencies may seem practical and attractive in the short term, using retirement funds to resolve short-term problems, like replacing damaged assets or covering debts, may be damaging the stability of consumers’ financial futures.

“Consumers must be wary of using their two-pot retirement system savings for costs that can easily be covered through conventional insurance products. Short-term insurance is designed specifically to provide immediate protection without touching your long-term savings. This ensures that your retirement funds are preserved for their intended purpose – your financial security in retirement.”

Gamsy says the uncertain economic climate is even more reason for consumers to think more carefully before making hasty withdrawals. “The two-pot retirement system is not a substitute for insurance but rather serves as an additional safety net for unforeseen emergencies. Tapping into retirement savings prematurely could compromise your financial future.”

According to Sanders consumers must view insurance not as an optional add-on but as an integral part of a comprehensive financial strategy. “Short-term insurance products protect you from having to dip into your savings for asset loss or damage. This is crucial because premature withdrawal from your retirement savings has both immediate tax implications and long-term effects on your retirement plan.”

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Better to balance short-term insurance and long-term planning

He says it is especially important to balance short-term insurance with long-term planning. “Many South Africans, across income levels, traditionally focused on short-term financial needs, such as paying premiums, covering bills and protecting immediate assets.

“However, with the introduction of the two-pot system, there is an opportunity to shift this mindset toward more balanced financial planning. Insurance should be part of a broader financial plan that includes short- as well as long-term strategies.”

Sanders emphasises that it is important for consumers to continue using short-term insurance for asset protection and reserve their two-pot retirement system funds for true emergencies that cannot be covered by conventional means.

“Thinking of two-pot retirement system savings as an alternative to insurance could also lead to underinsurance or even a complete disregard for the insurance products available to them.”

According to Sanders, South Africans should use short-term as well as long-term financial products in tandem with the two-pot system. “Short-term insurance is your first line of defence, while your two-pot retirement system savings should be reserved for emergencies that cannot be insured. It is crucial for consumers to maintain a long-term view of financial security.”

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Two-pot retirement system must shift consumers to financial planning

The two-pot retirement system presents a unique opportunity to shift consumer attitudes towards financial planning. “We noticed a trend where consumers are becoming more focused on product value rather than simply opting for the cheapest options,” Gamsy says.

“With the introduction of the two-pot retirement system, there is an opportunity for even greater awareness about long-term planning and the importance of protecting assets without compromising retirement funds.”

Sanders and Gamsy say educating consumers about these potential risks is vital. “It is the duty of brokers and advisers to inform consumers about the long-term implications of withdrawing from their two-pot retirement system savings for short-term needs. Insurance is there to prevent exactly that,” Sanders says.

“The two-pot system should not be seen as an immediate fix for today’s problems. Instead, it is a tool to enhance financial security and it should work hand-in-hand with appropriate insurance products to create a robust, holistic financial plan,” Gamsy says.