It seems that older people are risking their retirement plans and partaking in the two-pot retirement system. Picture: Pexels
Momentum has sounded the alarm at the sheer number of older South Africans taking part in the two-pot retirement system.
The insurer has expressed concern as older people who are making partial withdrawals from their pension funds so close to retirement.
The two-pot retirement system came into effect on September 1, 2024. The new regime allows some South Africans the luxury of withdrawing from their pension savings once a year, subject to a maximum of R30,000.
Chantal Marx, head of investment research at FNB Wealth and Investments said earlier this month that together with interest rate cuts, decent momentum in wages, and lower inflation could boost consumer confidence and drive an increase in spending in the months ahead.
Marx estimated that about R40 billion will be withdrawn from pension assets when the two-pot system comes into effect.
The impact of the two-pot system will in turn have a positive impact on domestic retailers, particularly discretionary names (clothing and furniture mainly), she added.
Momentum has sounded the alarm at the sheer number of older South Africans taking part in the two-pot retirement system.
Momentum noted that as of September 25, 2024, around 150,000 applicants had requested to withdraw some of their savings via the new system and this translated to a staggering R2.5 billion.
Momentum Chief Executive Jeanette Marais told Reuters that 80% of the applicants are between 30 and 49 years old.
She said that it was concerning that 16% of the requests were from people in the 50-59 age group.
"It's worrying that individuals who are so close to retirement are withdrawing from the savings pot, as they might not have enough time to make up for the shortfall," Marais said.
These figures paint a grim picture and according to Marais is a clear indication that many South Africans are in a desperate financial state.
She also noted that 98% of people asked to withdraw the maximum amount that they could get.
Old Mutual has warned South Africans who are tempted to withdraw from the two-pot system.
The withdrawal option may seem like a lifeline but it could end up costing you a lot more at a vulnerable age.
John Manyike, head of financial education at Old Mutual said that there are millions of elderly South Africans who spend their retirement years wondering if their money will see them through to their last days.
Far too late, they have realised that short-term convenience can have harmful long-term penalties.
“The two-pot system consists of two portions. One-third of future savings will be credited to a savings pot, and the two-thirds’ contributions will be credited to a retirement pot,” he explained.
“All the money in the savings pot can be withdrawn before retirement, but only one withdrawal per tax year will be allowed,” Manyike added.
The money left that has not been withdrawn will be in the unspent savings pot and will be the member's lump sum at retirement.
“It may sound like a great solution, but tax will also be payable on the withdrawn money. This tax will be equivalent to your normal tax rate. So, if you have a tax rate of 25%, the taxman will deduct this from the amount taken out. So, if you access R 10,000, SARS will want R 2,500,” he explained.
Manyike noted that South Africans should be aware that when money is taken out early from a fund it can impact the chances to benefit from potential fund growth, dividends, and interest that could be earned if the money stayed in the retirement account.
“If you saved R 20,000 for ten years instead of being moved from a fund, compound interest would make it worth about R 35,817 (For illustrative purposes for this calculation, an annual interest rate of 6% compounded annually was used),” Manyike explained.
Lastly, Manyike also argued reducing retirement savings means that as inflation and everyday costs increase, the member will be faced with the reality that their retirement income is restricted and cannot keep pace with price changes.
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