Two-pot retirement system: withdrawals not being used for emergencies

There is concern that pension fund members are using two-pot withdrawals from their pension funds not for emergencies as the system was intended for, but on day-to-day expenses such as home and car costs, paying off short-term debt, education and other daily expenses.

The two-pot retirement system implemented on 1 September last year was intended to preserve consumers’ retirement savings by giving them access to a portion of their savings, while they are not allowed access to the rest of the money even if they resign their jobs.

According to the new SpendTrend25 report from Discovery Bank and Visa on South African consumer spending habits based on an in-depth analysis of credit card spend data, the reasons pension fund members withdrew some of their savings under the two-pot retirement system, include home and car costs (24%), paying of short-term debt (21%), education, such as school fees, (20%) and daily expenses (11%).

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Two-pot retirement system withdrawals used for day-to-day expenses, not emergencies

Reporting on its revenue collections in the 2024/25 tax year, Sars said it received 2 805 727 applications for tax directives under the two-pot retirement system and finalised 2 535 252 for a gross lump sum of R47.7 billion that delivered R11.87 billion in tax revenue. Sars also managed to collect tax debt of R820 million through these withdrawals.

In the report, Discovery and Visa say the reasons for withdrawing under the two-pot retirement system shows that most of the money were used for day-to-day expenses instead of emergencies. “This reveals how long-term savings are used to cover immediate costs, even as inflation eases.

“While many South Africans are under financial strain, using retirement savings on short-term needs is a concerning trend. The unsustainability of this financial behaviour makes education on long-term financial management crucial across all income groups,” the report says.

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What people spend their money on

The report shows that consumers spend their money primarily on groceries, retail, travel, eating out, takeout and fuel, accounting for over 70% of total spend. However, priorities shift across income groups. While groceries take the top spot for mass, mass affluent and everyday affluent clients, high-net-worth individuals dedicate a larger share to retail and travel.

The high-net-worth segment spends 3% more of their share of spend on travel and 1% more of their share of spend on dining out than the South African average, while the everyday affluent group spends 1% more of their share of spend on dining out and takeout and only 2% less of their share of spend on travel, compared to the national average.

On the other hand, the mass segment uses 4% less of their total spending for luxuries like travel and retail, while the mass affluent segments spend 5%. According to the report, this highlights how consumers with lower spending power focus more on essentials like groceries and fuel, leaving less for discretionary spending on travel and retail.

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The city where you live determines how you spend

In South African cities, food (groceries as well as eating out and takeout) makes up the largest portion of spending, according to the report. Johannesburg residents spend a lower share on groceries and more on shopping as well as eating out and takeout compared to Durban and Cape Town.

Residents of coastal primary cities like Durban and Cape Town have a wider variety of social activities outside of dining out. People in Bloemfontein, East London and Gqeberha spend a greater share on food and fuel but less on travel as well as eating out and takeout, compared to those in Johannesburg, Durban and Cape Town.

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Other key findings about how people spend their money

Other key findings in the report include:

• Consumers are spending less on their credit cards despite lower inflation. The prime rate cut in September 2024 offered some relief, but recovery has been slow and led many to rely on value-based spending. In 2024, average spend growth was flat even as inflation fell from 6% to 4.4%.
• Busy lifestyles and the need for convenience increasingly influence consumer spending. Spending on eating out and takeout grew by 12% in 2024, outpacing growth in grocery spend (8%), with demand for convenience shaping consumer habits. Online grocery shopping in South Africa is still on the rise, with spend up 15%, while in-store grocery spend has grown by just 6%. When it comes to prepared food, spend on dining out is growing faster at 13% than ordering takeout online at 10%, indicating that grocery shopping is seen as a convenient task to do online, while eating out is a social experience.
• Virtual cards are growing in popularity as South African consumers prioritise safety and convenience.
• South Africans are travelling less internationally but are purchasing more online from international platforms. Travel spend is returning to pre-Covid levels, but at a higher cost per trip.
• Consumers browse online before they go and buy in-store.
• Consumers are using less cash and replacing it with real-time, digital payments. The consumer survey showed that 67% of South Africans use cash only a few times a month or never at all, with over 84% choosing cards or digital payments whenever they can.
• Online entertainment continues to surge. Spending on online entertainment is the fastest-growing category in South Africa, growing by 110% since 2023. Spending on online entertainment includes streaming services, sports betting and event bookings.
• Access to a wide range of subscription services is growing among South African consumers. While subscription services were once dominated by streaming, by 2024 they expanded to include artificial intelligence, sports bookings, groceries and eCommerce.

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Shifts in financial behaviour such as using two-pot retirement withdrawals for daily expenses

Hylton Kallner, CEO of Discovery Bank, says the latest report identifies shifts in financial behaviour for practical insights into how much people spent, what they spent on and how they spent it. “For example, while we saw a material shift to digital payments in our spend data, this is backed up by consumer preferences whereby over 80% of South Africans surveyed are choosing cards or digital payments over cash whenever they can.

“The same percentage engage more with their credit card rewards and benefits than they did a year ago as they focus on value-based spending.”

Lineshree Moodley, country head for Visa South Africa, says South African consumers are undoubtedly feeling the impact of rising living costs, which is driving a significant change in spending habits.

“Our research, in collaboration with Discovery Bank, shows that people across all income levels are making spending decisions with careful planning and strategic use of financial tools. The rapid growth of accessible and affordable online and digital payment methods is particularly noteworthy. Alongside these advancements, there are numerous tools and strategies available to help them navigate these challenges.”