The news that life insurance companies and their pension fund departments are receiving thousands of requests from people who want to withdraw money from their retirement funds in terms of the new two-pot system, and reports that some payments have been processed already, warrants a warning about the effect of a withdrawal on people’s pensions.
Calculations by pension funds reveal that the R20 000 or R30 000 you withdraw today can reduce your pension fund by retirement age by 10 times that much, depending on how many years are left until retirement and the expected investment returns.
Read:
Two-pot: Stay the course with your investment strategy
Eye-watering taxes await those who withdraw funds under two-pot
Effective from 1 September 2024, the recent changes to the Pension Fund Act split retirement savings into two pots. In terms of the new legislation, 90% of a person’s pension fund was placed in a ‘retirement pot’ and 10% in a ‘savings pot’. New contributions to the pension fund are split two thirds to the retirement pot and a third to the savings pot.
People are allowed to withdraw a maximum of R30 000 from the savings pot once every year. The reason for allowing people access to part of their pension fund is that authorities and pension funds noticed that people, when desperate, would resign from their jobs and opt for a payout of their pension funds.
The new legislation locks pension money away until retirement but allows limited access for emergencies from the new savings pot.
High demand
Pension fund managers and administrators, as well as the SA Revenue Service (Sars), have reported that thousands of pension fund members have already requested withdrawals from their pension funds, starting from the very first day.
SA’s largest pension fund manager, Sanlam, says the two-pot retirement system has led to a “surge in activity” from clients asking about withdrawals. It reported that it received more than 20 000 applications via its internet and mobile applications in just the first two days since the two-pot system came into force.
“This volume far exceeds the monthly average of 7 000 to 8 000 retirement, withdrawal or retrenchment claims usually processed by Sanlam Corporate. The average claim amount remained steady at R20 000 over the two days,” says Nzwa Shoniwa, managing executive at Sanlam Corporate.
In addition, Sanlam’s mobile app and internet portal has seen a surge of new registrations since 3 September – up 750% compared to the usual daily sign-ups.
Read:
Sanlam expects ‘modest’ two-pot outflows
Absa expects R78bn in two-pot withdrawals in first year
Shoniwa says a Sanlam survey earlier this year found that 59% of respondents were planning to access their savings pot, compared to just 31% of respondents who thought that in 2022.
“We know that South Africans are struggling financially given the current economic climate. The number of members resigning or being retrenched from their employers who encashed all or some of their retirement savings increased from 53% in 2022 to 72% in 2024.
“Of these members, 54% spent their encashed retirement savings on paying living expenses and reducing and settling debt. People are using these funds to make ends meet. This is one of the key objectives of the two-pot system – to provide South Africans with access to emergency funds when they really need it,” he says.
However, this relief comes at a huge cost.
Expensive money
Sanlam includes a detailed calculator on its website that enables a pension fund member to calculate the impact of a withdrawal on the value of their pension fund at retirement. The calculator takes into account a person’s age, number of years to retirement, current pension fund value and monthly contributions.
The calculator shows that the impact of a withdrawal will be huge for somebody who is far away from retirement – in other words, a younger person might be more likely to withdraw cash now because retirement is far in the future “and there is still long enough to save”.
A 35-year-old who earns R32 000 per month and contributes R2 000 per month to a pension fund is 30 years from retirement. Assuming they have R50 000 in their savings pot, that their monthly pension fund contribution increases by 6% per annum, and a market return of 8% per annum, the value of their savings pot will be R200 000 less at retirement age if they ask for R20 000 now.
Without a withdrawal, the savings pot will grow to R2.3 million by retirement at 65. Withdraw now, and the value falls to R2.1 million.
Importantly, this fund member won’t even get the full R20 000. They have to pay tax at their marginal rate and will get only R13 455 now.
Sanlam calculates that a withdrawal of R20 000 by a person who is 55 years old – using the same salary and assumptions – will reduce the value of the savings pot by around R44 000 at retirement age.
Limiting growth
The reason for the big impact when a younger person withdraws cash now is that they lose the compound returns over a much longer period.
Blessing Utete, managing executive at Old Mutual Corporate Consultants, says the option to access a portion of your retirement savings may seem like a relief in times of need, but can have a long-lasting impact on your future financial wellness.
“By reducing your retirement fund early, you’re limiting the potential for growth over the long term,” he says.
“Employers have a vital role in educating their workforce about the long-term benefits of preserving these funds. Keeping savings invested allows them to compound, helping increase the chances of having a more comfortable retirement for all employees when the time comes.”
Metropolitan says it has already processed the first payouts under the new two-pot system, but warns pension fund members to think carefully about using pension money early.
“We strongly advise the preservation of retirement policies wherever possible and recommend making withdrawals only after consulting with a financial advisor.
“Withdrawals from your savings pot could reduce your retirement savings by up to one-third,” says Metropolitan CEO Peter Tshiguvho.
Metropolitan’s calculation show that R30 000 could grow, with interest, to R200 000 over 20 years, assuming a return of 10% per year.
“This means that if you withdraw R30 000 from your retirement savings now, you will have R200 000 less available at retirement to purchase a retirement income or to take as a cash lump sum,” says Tshiguvho.
“It is unlikely that you are going to receive the amount you request. Sars will deduct tax and any tax that you might owe.
“The insurer might also deduct a withdrawal fee,” says Tshiguvho.
He also warns that a withdrawal might push a person into a higher tax bracket.
“Sars will include the withdrawal amount you request when determining your marginal tax rate in the current tax year.
“For example, say your current marginal tax rate is 18% on your salary and other income. A withdrawal of R30 000 from your savings pot could put you in a higher tax bracket with a tax rate of 20%. Sars will tax your salary for the full tax year at 20%,” says Tshiguvho.
“Use the two-pot retirement system to protect your retirement savings. It is up to you to avoid the temptation to withdraw from your savings pot.”
Listen: Two-pot: Unless it’s an emergency don’t withdraw
Follow Moneyweb’s in-depth finance and business news on WhatsApp here.
COMMENTS 5
You must be signed in to comment.
SIGN IN SUBSCRIBE
or create a free account.
Free users can leave 4 comments per month.
Subscribers can leave unlimited comments via our website and app.
Realistically speaking very few people can retire anyway based on the current cost of living. Inflation creep decimates pensions within 5-10 years especially with defined benefit pensions. A more logical approach is to work until you are not physically able and earmark those funds for healthcare costs as that will be a significant expense considering how medical aids work these days
32
Let people have their money now. It won`t make much difference to most people except the money managers who will have less to manage and less fees. Mostly they do not have our interest at heart.
20
21
Completely agree, in most instances, access to the savings pot may be the difference between losing your car, your house, and going into debt review and having an impaired credit record and losing the ability to ever get out of the black hole of debt. Most South Africans have been under immense pressure, salaries rising at a rate that is well below inflation, costs of load shedding, food price hikes, school fees etc. There is a real need for assistance which is not coming from the stat, the banks etc. BUT Financial Advisors who have been and still are living under a rock cannot see the impact the financial crises has had on families, what is the point of taking about retirement when they cannot even put food on the table now. Get off your Soap Box and go take a walk in the real world.
3
Let me tell you about this government.
They came up with this idea of 2 pot.
On 1 Sept gov empl pension fund (gepf) website was not updated nor their app. They said nothing. Not a notice or an email to workers. on 2 sep their website was updated to a notice saying that the site and app will be down 31 Aug and 1 sep but it was already the 2nd?!?! On the 3rd Sept the app only was updated for certain phones (few Android phones only) and everyone else will have to wait till the 26th September for mobile and web applications. This is the situation with government employees. Oh and they say it will take up to 60days to pay out. An emergency fund that takes 60 days to pay? 30% tax? Lose out of up to hundreds of thousands? Lose months on your service? All for a 20k.
7
When members of the Tripartite Alliance voted the ANC into power, they never anticipated that their assets, salaries, and savings would become the target of the socialist redistributive developmental state.
These myopic socialists and communists all believe that “other people”, the “capitalists”, will be financing their philanthropic redistributive policies. They thought that they would benefit from the process.
Now, after 30 years of redistribution, they realize that it is their livelihoods, municipal services, the purchasing power of their salaries, and the value of their pension funds that have been redistributed as social grants, BEE schemes, politicians’ salaries, and corruption.
All of a sudden the false philanthropists are not feeling so philanthropic anymore.
4
Load All 5 Comments
End of comments.