Two-pot retirement system: how to resist the temptation of withdrawing

Although fund managers were inundated with requests from pension fund members who wanted to withdraw from the savings pot of their pension funds under the two-pot retirement system, many chose not to withdraw, but now that extra money could start burning a hole in their pockets.

The introduction of the two-pot retirement system makes retirement planning more flexible, but it also brings a new temptation: accessing your retirement savings prematurely, Lizl Budhram, head of advice at Old Mutual Personal Finance, says.

“A well-structured retirement plan must adapt to life’s inevitable changes, whether it is a change in employment, a new baby, or an unexpected financial obligation without compromising our financial wellness.

“Flexibility should be achieved through smarter investment strategies, lifestyle adjustments and better-suited financial products, rather than dipping into retirement savings.”

Budhram says as your life’s financial demands shift, it is essential to have a dynamic plan that can adapt and grow with your changing needs.

She says consumers can use these practical ways to stay on track:

Avoid lifestyle creep

Life events such as job promotions or pay increases often lead to lifestyle inflation where you buy a bigger home or a more expensive car. While this can feel like a reward for hard work, it increases the amount of money you will need to maintain the same standard of living in retirement.

“Avoiding lifestyle inflation is essential because overspending now may lead to financial strain later, tempting you to tap into your accessible retirement savings to maintain your lifestyle. By controlling lifestyle creep, you reduce the risk of relying on retirement funds for short-term needs.”

ALSO READ: Two-pot retirement system: before you withdraw, ask yourself

Create an independent emergency fund

The two-pot retirement system provides access to a portion of your retirement savings before retirement for emergencies but Budhram says it is important to maintain a separate emergency fund that is not tied to the fluctuations of financial markets.

You should keep this fund in a stable, easily accessible account, such as a savings account, which is not affected by market volatility.

Research from Old Mutual indicates that many consumers wanted to use their withdrawals from the accessible two-pot retirement system’s ‘savings pot’ to pay off debt, cover medical emergencies and manage unexpected expenses. This shows how important an emergency fund is for consumers.

“It is essential to ensure that seeking short-term financial relief does not jeopardise your long-term financial security. Establishing an independent emergency fund allows you to manage unforeseen costs while safeguarding your retirement savings, ensuring they remain dedicated to their intended purpose: your future retirement.”

ALSO READ: How to build your emergency financial safety net

Use the right tool for the job

While an emergency fund is specifically designed to cover urgent needs, discretionary investments, such as a tax-free investment vehicle serve a different purpose. Tax-free investments can give you access to money when needed while growing faster than inflation if left invested for longer terms.

Budhram says by using financial products like tax-free investments or other discretionary investments, you can manage non-emergency financial needs, such as saving for your children’s university tuition, without losing the tax benefits you accumulated by saving for retirement.

“By incorporating these products alongside your emergency fund, you create more financial options and flexibility without risking your long-term retirement security.”

ALSO READ: Why dipping into your two-pot retirement savings is not a wise decision

Make your asset allocation work for you

Retirement planning is not just about saving, Budhram says. “It is about growing your money. During big life events, such as losing your job or starting a family, immediate stability often takes priority. Then it is tempting to switch to low-risk investments, but that can limit your growth in the long run.”

She says when you are in the accumulation phase, actively saving for retirement, being too conservative means that the value of your money will not keep up with the rising cost of living over time, which is a problem when you try to save for retirement.

“A balanced mix of investments, combining both higher- and lower-risk options, is key to managing risk while growing your savings.”

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