How the two-pot retirement system will help young consumers

The two-pot retirement system that will be implemented on 1 September will bring about a revolution in retirement for young consumers in South Africa, by helping them save two to three times more that they would have under the current system.

By addressing the urgent need for financial liquidity and the essential goal of preserving retirement savings, the two-pot retirement system is poised to guarantee a brighter future for employed South African youth, Keri-lee Edmond, the analytics and insights manager from Old Mutual Corporate Consultants leading a new quantitative investigation about the two-pot retirement system, says.

“The ingenuity of the two-pot retirement system lies in its ability to acknowledge the need for immediate financial access, reflecting our socio-economic reality, while still safeguarding long-term retirement goals.

“This marks a momentous shift in conventional thinking and one which we believe will have a significantly positive effect on retirement outcomes in the future,” Edmond said.

Two-pot retirement system will help youth

Edmond’s research indicates that the two-pot retirement system could enable young South Africans entering the workforce to save up to 9.5 times their annual salary by retirement, even if they use the entire savings component for emergencies.

If they make no emergency withdrawals, their savings could reach around 14.5 times their annual salary, ensuring greater financial security in retirement.

Currently, typical members of provident or pension funds save only 2.7 times their annual salary, which undermines post-employment financial stability.

Experts recommend saving 10-15 times your annual salary to replace 70%-75% of your working income in retirement, highlighting a significant shortfall in current savings practices, Edmond says..

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“The two-pot retirement system promises significant progress towards financial security for all employees in occupational funds.

“However, employers play a key role in promoting financial education and creating innovative, less expensive forms of liquidity in a crisis.

“It is important to emphasise that withdrawals from the savings pot should be avoided.”

Edmond says the Old Mutual On Track research 2023, which analysed half a million employees in umbrella funds, revealed that members of employer retirement funds have been withdrawing 100% of their retirement assets in cash when changing jobs.

New system will preserve value while offering access

“This action represents the most significant destruction of value and has a negative multiplier effect.

“The two-pot retirement system aims to address this by preserving assets while allowing access to savings in difficult times.

“Compulsory preservation ensures more assets remain invested for longer, benefiting from compound interest and resulting in higher retirement savings.”

She says the legislation requires two-thirds of retirement savings to purchase an annuity, providing regular income in retirement and financial security for leisurely activities.

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“Additionally, employees can withdraw from their savings component annually without leaving employment, addressing the current economic reality for many South Africans.

“New employees should be encouraged to engage in financial planning and set aside additional emergency savings as they join the workforce, providing a cost-effective alternative to emergency withdrawals and helping to avoid debt.”

However, the two-pot retirement system is not only good news for young consumers. It is also good news for older workers too.

“The simulations also show that for older members with at least 11 years of service until retirement, the new system is expected to provide outcomes at least equal to, if not better than, the current system.

Positive affect on all savers no matter their age

“This new policy is a robust solution for today’s economic challenges and will have a positive impact on employees of all ages.

“The longer individuals spend in the two-pot retirement system, the more positive that effect will be.”

Edmond says the retirement landscape is evolving and South Africa is taking action to improve outcomes for all individuals, with employers playing a crucial role.

“The two-pot retirement system is anticipated to revolutionise retirement planning in our country, offering substantial improvements in savings, especially for younger workers.

“By effectively balancing immediate financial needs with long-term retirement goals, it promises a brighter and more secure future for all and we look forward to witnessing the positive impact this will have on our society.”

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