Understanding the Two-Pot Retirement System: risks and benefits

The Two-Pot retirement system is not, in itself, the greatest threat to South Africans' retirement security. The real risk arises when people begin to view their retirement savings as an ordinary savings account rather than a long-term investment intended to provide income during retirement. Much of the debate surrounding the two-pot system has focused on the wrong issue. 

The two-pot retirement system is not necessarily the danger. It was introduced to address the practical challenge faced by many retirement fund members who previously had limited access to their retirement savings without requiring them to resign in order to unlock their pension benefits. The real risk emerges when retirement savings are viewed as an easy source of cash rather than money specifically set aside to fund retirement.

 The system was designed to strike a balance between short-term financial pressure and long-term retirement planning. For many households, the savings component provides much-needed financial relief when unexpected expenses arise. That does not mean, however, that every withdrawal is a sound financial decision. Every time money is withdrawn, that capital potentially loses the opportunity to generate compound growth over many years.

The greatest risk is not a single large withdrawal, but rather a series of smaller withdrawals made over time. People often assume that small withdrawals make very little difference. In reality, it is these repeated withdrawals that can have a significant impact on your eventual retirement savings over several decades.

Financial security is rarely destroyed by one major decision; it is more often gradually eroded by many small decisions made over the course of years. South Africa does not need to look far to understand the potential long-term consequences. International experience shows that while early access to retirement savings may provide short-term financial relief, it often leads to lower retirement benefits and increased pressure on public finances in the long run.

During the Covid-19 pandemic, Chilean workers were allowed to withdraw substantial amounts from their pension funds to ease financial hardship. Millions depleted a significant portion of their retirement savings, future pension income declined considerably, and the government was later forced to provide greater financial support to retirees. The Two-Pot system therefore also has an important educational dimension. Every withdrawal should be a deliberate financial decision.

People should ask themselves not only how much money they need today, but also what that withdrawal is likely to cost them over the next 10, 20 or even 30 years. The impact of compound growth is often underestimated. When you withdraw money from your retirement fund, you do not only lose that amount. You also potentially lose all the future growth that money could have generated over many years. It is this invisible cost that has the greatest impact on long-term financial security.

Individuals approaching retirement age, particularly those with limited time remaining before retirement, should carefully consider the long-term impact of withdrawals. Many South Africans in this age group have already lost retirement savings during their working lives due to changing jobs, difficult economic circumstances or interruptions in contributions. They simply have less time to recover those losses through compound growth. Every additional withdrawal can therefore have a far greater impact on their financial security in retirement.

The two-pot retirement system should not be viewed as the final destination, but rather as the beginning of a broader process to further strengthen South Africa's retirement system. The next phase should place greater emphasis on financial literacy, stronger incentives to preserve retirement savings, and policies that encourage people to save more for retirement over time. The objective is not to deny people access to their savings, but to ensure that short-term financial relief does not ultimately create long-term financial insecurity.

* Van Zyl is the chief executive officer of Everest Advisory Services

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