Retiring with R1 million less? Major warning to South Africans making two-pot withdrawals - IOL
South Africa’s two-pot retirement system allows workers limited access to retirement savings, but repeated withdrawals could significantly reduce the amount available when they retire.
South Africans who regularly dip into their retirement savings under the two-pot system could be giving up more than they realise, with one analysis estimating that repeated withdrawals could leave an employee with about R1 million less at retirement.
According to an analysis by Paymenow Reward and Benefits Lead Advisor René Richter, an employee earning R30,000 a month who withdraws the full savings-component allocation every year for 30 years could receive R399,600 in after-tax cash, but retire with about R1.01 million less than if the money had remained invested.
The two-pot retirement system, introduced in September 2024, allows retirement fund members to access money from a savings component once per tax year, while keeping the bulk of their retirement savings protected until retirement.
The system was designed to give employees access to cash during financial emergencies without forcing them to resign or cash out their retirement funds.
Richter said the concern was that employees could start treating the annual withdrawal as part of their household income, without considering the impact on their retirement savings.
"The two-pot system does what it was designed to do. It helps stop employees resigning to reach their retirement savings, and it keeps them out of expensive credit in a genuine emergency," Richter said.
"The risk is that the withdrawal becomes an expectation in the annual household budget, and that the compounding effects of interest aren’t taken into account. Financial education needs to move past explaining how to withdraw and start showing employees what they are giving up.”
The difference is largely due to the loss of compound growth on money withdrawn from the fund.
In Richter’s example, the employee contributes R4,500 a month to their retirement fund, or R54,000 a year. Of this, R18,000 goes into the savings component and R36,000 into the retirement component.
He stressed that, without withdrawals, the contributions could grow to about R3.03 million in today’s money by retirement. With the full R18,000 savings allocation withdrawn every year, the amount would grow to about R2.02 million.
IOL previously reported that South Africa’s two-pot retirement system is increasingly being used by middle-class households to cope with rising living costs and debt, with many members making repeat withdrawals from their retirement savings.
According to new data from Momentum Corporate, 52% of members who are eligible to withdraw from their savings component have already done so.
The survey found that established middle-income households are among the most likely to make repeat withdrawals, while many lower-income members cannot access the money because their savings fall below the R2,000 minimum withdrawal threshold.
