Two-pot retirement system: The long-term value of not withdrawing

While millions of South African pension fund members are waiting for next week to withdraw some of their retirement savings under the two-pot retirement system to fill a few financial gaps, experts are urging them to think twice and consider the long-term value of not withdrawing.

In the world of personal finance, there are few decisions that have as significant an impact on our future as those concerning our retirement savings. Retirement savers will have to decide whether to withdraw the money that will become available in their savings pot in case of an emergency or leave it to keep growing for years to come.

“While the temptation to access these funds under the two-pot retirement system may be strong, especially in today’s challenging economic climate, the long-term benefits of patience and disciplined saving far outweigh the immediate gratification of withdrawing the money now,” William Khwela, senior tax specialist at Nedbank Private Wealth, says.

He says you should think of your retirement savings as a forest of trees. “Each contribution you make to your retirement fund is like planting a new seedling. Over time, these trees grow and produce more seeds, expanding your forest so that you will eventually have enough financial ‘timber’ to live off once you retire. The two-pot retirement system essentially gives you the option to harvest some of that wood before retirement age.”

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Access to the seeding capital in the savings pot

With the first harvest, you will have access to the seeding capital in the savings pot, Khwela says. “This is a one-off allocation from your existing retirement savings on 31 August 2024. It amounts to 10% of your total retirement fund value on that date, capped at R30 000. This seeding capital within a savings pot is separate from your ongoing contributions and designed as a type of bridge between the old and new retirement systems.”

He says you must think of the seeding capital as a young and healthy tree in your forest that is ready for harvest if you choose to do so, but it is still small when compared to many of the other trees. “Before you reach for the axe, it is worth considering the potential of letting that tree continue to grow for years to come.

“The potential for growth in retirement savings is clear, as any growth is not taxed. If you leave that young tree to grow from the maximum seeding capital of R30 000 at an average annual investment return of 7% for 10 years, it will be worth R59 000. In 20 years, it will be worth R116 000.”

And if you can leave it for 30 years, your patience will be rewarded with growth to a staggering R228 000, nearly eight times your original vesting amount and you will not have to do anything other than resist the temptation to withdraw from it, Khwela says.

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Consequences of withdrawing R30 000 under two-pot retirement system

“But if you choose to withdraw the maximum R30 000 after 1 September, the South African Revenue Service (Sars) will also take its share. At a 20% marginal tax rate, for instance, you’ll receive only R24 000, which is significantly less than your potential long-term gains.”

Khwela acknowledges that it is easy to say you should leave your savings pot invested until retirement, but what if you really need the cash down the line? “That is why cultivating financial resilience is so important.

“Just as a diverse forest can withstand environmental challenges, a well-managed savings strategy can help you weather financial storms without compromising your long-term security. There are many simple ways to avoid having to dip into your savings pot and keep your retirement savings where they should be: firmly planted and growing for your future.”

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Before withdrawing your retirement savings, consider this

• Having an emergency fund: Start building a separate emergency fund to handle unexpected expenses so that you do not have to cut down retirement trees for short-term purposes.
• Exploring alternative financing: If you urgently need funds, consider speaking to your bank about a personal loan at a competitive interest rate. It means you will have to pay the money back with interest, but the long-term value of leaving your retirement savings untouched will far exceed these costs.
• Setting clear financial goals: Having clear goals can help you save purposefully towards the things you need in the future without compromising your retirement plans.
• Making extra contributions: Consider making additional contributions to your retirement savings as part of a recovery strategy. If you find that your financial situation improves shortly after dipping into your savings pot for emergencies, use your additional voluntary contributions to replace funds in your retirement fund. Doing so allows you to take advantage of a tax deduction at your marginal rate, capped at R350 000, with any remaining balance carried forward for use in future tax years.

Khwela says as the two-pot retirement system comes into effect, you will have more flexibility than ever to manage your retirement savings. “However, with this flexibility comes responsibility. Every time you consider withdrawing from your savings pot, remember that you are effectively cutting down young trees full of growth potential. That goes against the reason you are cultivating that forest in the first place so that you can one day enjoy the retirement you deserve.”