Think twice before tapping into your retirement savings under the two-pot system

Previously, one of the only ways South Africans could cash out their pensions before retirement was when switching jobs. The much-awaited two-pot retirement system will change that by allowing people to access a portion of their pension savings before retirement — without resigning from their jobs.

When this new system launches on September 1, all of a person's existing pension fund savings will be allocated to a “vested component” and the new rules will not apply to these savings. Future pension fund savings will then be divided into two “pots”, with one-third allocated to a “savings pot” and two-thirds to a “retirement pot”.

Here's how the new two-pot retirement system will work:

• As of September 2024, there will be a once off allocation (10% capped at R30,000) from the vested component to the savings pot as an opening balance.
  
  
• The funds in this savings pot are designed to be used as a lump sum at retirement. However, people will have the opportunity to access a portion of those funds for emergency purposes, once each tax year, before retirement.
  
  
• The retirement pot is where the savings that will only be available at retirement will be kept.

“The advantage of the two-pot system is that it may provide people with some relief to meet their unexpected financial needs or emergencies,” says John Manyike, head of financial education at Old Mutual. 

However, warns Manyike, the attraction of immediate financial relief must be balanced against the potential long-term risks. He urges people to exercise caution and seek financial advice before making any decisions regarding their pension funds.

“Tapping into retirement savings prematurely may lead to individuals struggling to keep up with their current standards of living at retirement, with potentially negative repercussions on their overall financial wellbeing during retirement,” he says.

Manyike adds that people need to understand the difference between emergency savings and retirement savings. While the two-pot system aims to help towards alleviating unexpected financial pressures, it's crucial for individuals to understand that retirement savings are designed only for one purpose — retirement and nothing else. People therefore must ensure that they work on building their own emergency savings, and not rely on the two-pot system for this purpose. 

There’s also an issue of tax. While savings remain tax deductible and tax free while growing in a pension fund “savings pot”, it's crucial for people to understand the implications of withdrawing from these savings before retirement. 

“There are tax implications that will impact both the money withdrawn and the money left in the fund for retirement. Just because the opportunity to access funds exists, people must be cautious because there are opportunity costs involved,” says Manyike. 

Under the two-pot system, withdrawals from the savings component before retirement will be taxed at marginal rates, like other forms of income. It's essential to note that only one withdrawal from the savings component is permitted per tax year, with a minimum withdrawal amount of R2,000.

It's important for people to understand that just because they can withdraw money from their pension savings, they don't necessarily have to, says Manyike. Instead, he suggests that people consider preserving their pension savings for as long as possible and aim to preserve the funds for retirement.

“Pension savings are designed to grow at compound rates, meaning that at retirement people will end up with a lot more pension savings if they opt for preservation rather than withdrawals,” says Manyike.

To get in touch with a financial adviser, visit the Old Mutual website or call 086-060-6060.

This article was sponsored by Old Mutual.
_{Old Mutual Life Assurance Company (SA) Ltd is a licensed FSP and life insurer.}