South Africa

Will the two-pot retirement system be good or bad for retirement savings?

two pot retirement system

The two-pot retirement system that will allow consumers to draw some of their retirement savings before they retire, will kick in in March next year, but there are concerns that it will have a negative effect on retirement savings.

Despite doubts over the short-term tapping of savings, the benefit is worth the immediate access in the long run, argues Old Mutual retirement reform executive Michelle Acton.

In South Africa where pressing financial needs constantly intersect with long-term planning, the imminent arrival of the two-pot retirement system on 1 March 2024 has sparked a thoughtful debate about the delicate equilibrium between immediate financial necessities and securing a comfortable retirement, she says. 

“This new system, while well-intentioned, raises pertinent questions about whether it might inadvertently encourage short-term access to pension funds and potentially compromise the foundation of long-term retirement savings.”

Two-pot retirement system: ‘Type of emergency fund’

Acton explains the cornerstone of the two-pot retirement system lies in its aspiration to provide individuals with the flexibility to access a portion of their pension savings before retirement.

“Essentially, it enables a type of emergency fund, that long-stable pillar of sound personal financial management that allows consumers the breathing space to fund unexpected expenses instead of turning to expensive debt alternatives.” 

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Intention is laudable, but what about the nest egg?

This intention, she says, laudable as it is, prompts one to consider whether such access might inadvertently deter savers from staying committed to the very essence of a pension fund that is building a nest egg that ensures a dignified retirement.

“This system will likely amplify the existing culture of short-termism, where individuals prioritise present needs over future financial security. South Africans are expected to dip into those accessible pots in significant numbers, accessing up to one-third of their available future retirement savings after 1 March.”

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Two-pot retirement system the lesser of two evils…

However, she says, at the same time the system also counters the more significant problem of full access to pension savings.

“The real enemy is the current pension fund system that allows members to cash out completely when changing jobs. Most members end up using all their savings and have to start all over again, missing out on valuable compound interest that builds over time, resulting in insufficient savings to fund retirement.”

National Treasury estimates that only 6% of South Africans can look forward to a comfortable retirement and that is why Acton says the two-pot system is the lesser of the two evils.

“At the very least, it solves one problem: More South Africans can retire better.”

Financial education

That is why financial education is important. Acton says education then becomes the bedrock of navigating this problem.

“Indeed, the real challenge lies in helping individuals understand that their financial choices today wield far-reaching repercussions for their twilight years.

“While immediate financial relief might seem alluring, the actual value of the two-pot retirement system lies in its ability to empower individuals to make informed decisions that strike a harmonious balance between the present and the future.”

This leads us to consider the immediate financial struggles many South African consumers face, Acton says.

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Two-pot retirement system will be welcome respite

“The two-pot retirement system’s initial seeding of 10%, capped at R25 000 from the existing pension fund into the savings pot, offers a welcome respite for those grappling with inflation and high living costs.”

However, she warns, it is essential to recognise that this injection, while providing momentary relief, should not be misconstrued as a cure for all financial ills, but rather a steppingstone toward a more secure financial future based on prudent financial planning and saving. 

Critics might question how effective the two-pot retirement system will be to ensure short-term relief and long-term prosperity, but this system does not pretend to be the silver bullet to today’s current woes, Acton says.

“Instead, it seeks to establish a foundation to build future financial security. It is not merely about granting access but about cultivating a sense of responsibility over your financial journey.” 

Can this approach inspire a behavioural shift in individuals toward a more holistic understanding of their financial wellness?

Acton says this remains the crux of the matter: will this system, supported by the proper education and awareness, transform impulsive financial decisions into more calculated moves?

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Two-pot retirement system might make consumers think twice

“The system will likely force members who want to access their savings to take a far more active role in the stewardship of their retirement savings,” Acton explains.

“Fund members are far more likely to have to find out how much they can access, how much they have in their accessible savings pot and be aware of how much their savings have grown yearly. This ‘forced’ interest will be more effective than any consumer education drive, extolling the virtues of future retirement savings benefits.”

As we wait for this revolutionary shift in pension management, we must embrace the nuances, she says.

“The two-pot retirement system encapsulates a journey to a more secure financial future. It demands that individuals understand that their choices today ripple across decades and that prudence is not a momentary virtue but a lifelong practice.” 

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Balance between immediate needs and long-term dreams

Acton points out that the road to financial security, guided by the two-pot retirement system, hinges on our ability to find a balance between immediate needs and long-term dreams.

“It provides an invaluable safety net as it guarantees that all pension fund members can at the very least count on two-thirds of their savings being ringfenced until retirement.”

Therefore, she says we must tread this path with awareness, education and the wisdom to recognise the actual value of the two-pot retirement system, not as a shortcut but as a compass guiding us toward financial wellness in a retirement savings crisis.

“While not immediately apparent, a sober analysis indicates the answer is emphatic: this new system is a monumental step forward in the battle against the financial struggle that most South Africans face when they retire.”

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