Words on wealth: Two-pot system a year on – the signs are good

It is a year since the so-called “two-pot” retirement savings system came into effect in South Africa, with the aim of forcing employees to retain a major portion of their retirement savings until they need it most – when they retire.

Is it working as expected? There have been teething problems, but it appears that, overall, members’ long-term outcomes will be far better than if they continued being able to cash in their retirement savings when they changed jobs. Still not ideal, but much, much better.

To recap. Since September 1 last year, contributions to retirement funds have been channeled into two “pots”: one-third into a savings pot and the other two-thirds into a retirement pot. Savings accumulated before then went into a third pot, the vested pot, which remained subject to the pre-two-pot rules.

The savings pot, which was seeded with up to R30 000 from the vested pot, was available to fund members from September 1, 2024. You can withdraw up to the entire amount in the savings pot once a year, with a minimum withdrawal of R2 000. Because retirement contributions are tax-deductible, you will be taxed heavily on the withdrawal.

The retirement pot, which by now will have accumulated a year’s worth of contributions and will continue to grow year by year, is not accessible until you retire at age 55 or later. Not even if you change jobs. If you change jobs, you still have access to the money in your vested pot – again with a heavy tax knock. Young employees who started work in the last year have only savings and retirement pots.

Is it working?

A number of presentations and discussions at last week’s annual conference of the Institute of Retirement Funds Africa at the Cape Town International Conference Centre were devoted to this question. It turns out that the new system has had positive spin-offs, such as members taking a greater interest in their retirement benefits, and funds improving their communication with members and upgrading their systems to provide digital solutions. Here, I focus on the statistics around savings-pot withdrawals.

In her presentation “Retirement Reform: Regulatory Changes and Operational Focus”, Michelle Acton, executive of retirement reform at Old Mutual, said the industry had been hit by a deluge of withdrawals in September 2024 and then again in March this year, at the start of the new tax year. Old Mutual’s withdrawal statistics and member surveys showed the emergence of three member profiles based on their savings-pot withdrawals:

1. Preservers: these members have the discipline to preserve their savings until retirement.
2. Contingency withdrawers: this group would use the pot for emergencies, but otherwise will try to preserve.
3. Serial claimers: these are people who withdraw when given the opportunity and are likely to empty their savings pot once a year.

Guy Chennells, chief commercial officer at Discovery Corporate and Employee Benefits, in his presentation “Observed Behaviour of Members Around Retirement Savings”, said Discovery’s statistics showed that 39% of members eligible to withdraw from their savings pots had done so, while a welcome 61% had opted to preserve. 

The highest first-time withdrawal rates were among younger generations (30% of millennials and 27% of Gen Zs) and among lower-income earners (43% of people earning less than R125 000 a year, decreasing to 7% of those earning more than R1 million a year). When members could make a second withdrawal in March this year, the highest repeat-withdrawal rates were among millennials (14%) and people earning between R250 000 and R500 000 a year (16%).

Retirement fund administrator Alexforbes has shown similar statistics. Vickie Lange, head of corporate best practice at Alexforbes, says that across its 1.1 million actively contributing members, more than 650,000 savings-pot claims worth R9.5 billion had been processed in the first round of withdrawals. This dropped to 270,000 claims worth R2.5 billion in the second round, since March 1. 

As with Discovery, the majority of members (65%) have not withdrawn from their savings pots. “This is evidence that many employees are making informed decisions about preserving their long-term retirement savings,” Lange says. Of the 35% who did withdraw, 15% withdrew only the first time around, 14% withdrew in both tax years, and 6% withdrew for the first time this tax year.

Why did people withdraw?

Acton said the Old Mutual survey found that 45% of members were using the money to pay off debt, 18% to cover school fees, 11% to pay off a mortgage bond, and 6% to buy groceries.

At Discovery, Chennells said that the most cited reasons for withdrawing were education costs, car and home expenses, short-term debt, and day-to-day living costs. Only 2% of withdrawals were for emergencies, which is ironic, considering this was the main justification for the two-pot system being introduced in the first place.

The bottom line

In his presentation, Chennells argued that despite the negative news coverage around the huge number of withdrawals, it is evident that the two-pot system is improving outcomes across the board. In modelling future retirement outcomes, a 25-year-old beginning a career today will have 10 times the amount saved come retirement than if, under the old system, he or she cashed in at each job change.

The biggest surprise was the boost to overall savings across the industry. In the next 40 years, Chennells said that, without the two-pot system, retirement fund assets would likely increase from about R4 trillion today to about R50 trillion, assuming current savings trends. However, under the two-pot system, even if all members cashed in their savings pots every year, assets could reach more than R150 trillion – three times higher. And if, as Discovery has observed, over 60% do not withdraw, assets could surpass R200 trillion in 2065.

* Hesse is the former editor of Personal Finance.

PERSONAL FINANCE