Navigating financial systems can be daunting — and even more so when new concepts come into play. One such concept racking our brains is the new ‘two-pot’ system.
“From 1 September 2024, your retirement savings and future contributions will be split into three components or ‘pots’. Your existing savings by 31 August 2024 will become your vested pot. Future contributions will be split as follows: one third into your savings pot and two thirds into your retirement pot. Your vested pot remains subject to the rules that applied prior to 1 September 2024,” Renee explains.
“A single withdrawal is allowed from your savings pot once per tax year with a minimum withdrawal amount of R2 000 while your retirement pot will have to be used to purchase a retirement income when you retire.”
With the announcement of the two-pot system came subsequent news of the impact on the total retirement investment industry. Renee says that this shouldn’t be a concern if you are investing with a trusted financial services provider with professional investment managers.
Further, it is too early to assess the long-term impact of the two-pot system on pension fund and retirement savings growth. “It would be to your benefit to discuss your questions and fears with your financial advisor, who can provide you with the necessary information to help stay on course,” she says.
Glamour: How might the two-pot system affect individual retirement planning strategies?
Renee Coughlan: Your individual retirement planning should not be affected as your existing contributions will continue, but will be split into two pots now instead of one pot. It is important, however, to review your retirement planning frequently to ensure you are making adequate contributions to reach your retirement goals. Withdrawals from your savings pot will negatively impact your ability to reach your retirement goals.
Glamour: Can you explain the impact of the seeding process on 1 September 2024?
Renee Coughlan: To start your savings pot, 10% of your vested pot (up to a maximum of R30 000), as of 31 August 2024, is used to seed the savings pot. This is a once-off allocation. For example, if you had R300 000 in your vested pot on 31 August, 10% or R30 000 is seeded into your new savings pot. If you had R100 000, then 10% or R10 000 is seeded.
Glamour: How might the two-pot system influence consumer behaviour and spending patterns?
Renee Couglan: There are concerns that the savings pot could be seen as a savings account and will be accessed whenever emergencies or needs arise. Data around consumer spending patterns is also disheartening in many taking up extra debt and using short term credit to spend on lifestyle and consumables.
Consumers are warned against thinking of this as easy access to money and encouraged to bear in mind the long- term consequences. Human behaviour is to go for instant gratification and live in the now without thinking of the future impact. Education is key in supporting good financial behaviours.
Glamour: What are some potential financial implications of using the savings po for emergencies?
Renee Couglan:
• Less monetary value at retirement age (the value you retire with could be
one third less).
• No access to a lump sum at retirement.
• Less income in retirement years.
• Less growth in the pots, which leads to less compounding over time.
• Higher tax deducted from your withdrawals, compared to the tax you
would have paid upon retirement.
• Administrative costs of the withdrawal. Any amount withdrawn from your savings pot will be added to your taxable income and taxed at your current marginal tax rate. (The reality is, for many people, their marginal tax rate now is higher than what their tax rate would be at retirement age.) The added amount to your taxable income might even push you into a higher tax bracket and the tax will be withheld by the fund administrator and paid across to SARS.
We recommend you consult with a tax specialist to understand the potential tax implications.
Glamour: How should individuals manage withdrawing from their savings pot to optimise their retirement savings?
Renee Couglan: Ideally, money that is earmarked for retirement should not be withdrawn.
Make sure you have some emergency savings so that you don’t have to dip into your savings pot. This savings pot should only be used if there is a real financial emergency and you have exploited all other alternatives. Every withdrawal will negatively impact the future value of your retirement benefit and the income that you will get in retirement years, because of missing out on the boosting benefit of compounding.
Glamour: What are the implications for those individuals close to retirement age?
Renee Couglan: For those nearing retirement, it is important to stay committed to the plan. Often when nearing retirement, we see many making poor financial decisions as they feel they have not saved enough and often suffer from high levels of anxiety.
Stay on track and don’t make decisions that could have negative impacts like drastically changing your investment strategy, making withdrawals without considering the options, and not taking tax into account.
Glamour: Should individuals make adjustments to their investment portfolios or savings strategies?
Renee Couglan: The overall investment strategy that you initiated at the first stage of retirement planning should not be drastically altered. It is still important to have a diversified approach with immediate access to emergency savings, shorter term savings for unexpected events and a long-term strategy for growth. In our opinion, the savings pot does not constitute emergency savings’.
A trusted financial advisor can review your unique circumstances and devise, alongside you, a proper financial plan to save towards sufficient, liquid emergency savings, to reduce the chances that you need to dip into your savings pot.
Remember, even though it is colloquially called your ‘savings pot’, this money is still part of your retirement savings.
Glamour: How can individuals balance withdrawing from their savings pot and maintaining sufficient funds in their retirement pot?
Renee Couglan: From 1 September, contributions will be split with 1/3 going into the savings pot and 2/3 going into the new retirement pot. These rules have been implemented to ensure an adequate balance between accessing a small portion in genuine emergency but preserving the retirement pot until retirement date. If someone has no choice but to make a withdrawal from their savings pot, it would be advisable to aim to return that amount through increased contributions going forward – this could reduce the negative impact of losing out on compound growth. (Think about it as trying to ‘break even’ again to the same point you would have been at if no withdrawal was made.)
Glamour: How can individuals make the most of their savings and avoid common pitfalls due to early withdrawals?
Renee Couglan: Make sure you have a very good understanding of the rules of the two-pot system. Many do not take the withdrawal processing cost or the tax at marginal rates into account. Good investment behaviour is to be disciplined and stay committed to the retirement plan.
Financial habits, such as saving regularly and making use of all of your tax deductions and tax benefits, should be the focus. Instilling these good financial habits will provide a solid foundation to grow your hard-earned money into the future.
Common pitfalls to avoid would be the temptation of accessing the cash, just because it is now easier to access. Avoid using your savings pot money to pay for “nice to haves” like a holiday. Focus on achieving long-term capital growth and appreciation that is possible with a proper financial plan, so that your vision of a comfortable retirement can become a reality.
Glamour: How might the two-pot system affect debt repayment and saving for future financial goals?
Renee Couglan: South Africans are highly indebted — and this is typically not debt secured by an asset like property, but unsecured debt, such as using credit cards or store credit to fund consumables and lifestyle.
Unsecured debt is far more expensive than secured debt, with higher servicing costs (i.e. interest charged on this). With rising costs of living, and wages not sufficiently keeping up with inflation, many South Africans find themselves continuously trapped in debt. Accessing their savings pot might be an attractive option to try to claw their way out of this.
However, South Africans need to consider that using their savings pot is not ‘free money’ — there are explicit and implicit costs that need to be weighed up, including the opportunity costs of diluting your retirement savings, versus the cost of the debt. The best approach would be to first consider other options to reduce the debt burden, for example, can debt be consolidated or can cheaper debt options be used?
Glamour: What should investors consider when evaluating the potential impact of the two-pot system on the stock market and investment opportunities?
Renee Couglan: Some commentators anticipate about 1% of the local retirement fun industry, valued at around R5.5 trillion, could be withdrawn. It is further estimated that between R50 billion and R55 billion could be required to seed the savings pots, which would in theory be accessible to members.
The immediate impact of this on the stock market and investment opportunities is, however, tricky to assess, as all of the cash won’t flow out at the same time and might be spread across multiple months. There might be a substantial withdrawal out of the savings industry over the next few months, before withdrawal levels settle into a more ‘stable’ pattern, as investors can access their savings pot only once per tax year.
[...] Although it seems like there might immediately be more cash in the pockets of cash-strapped consumers, it might be far less than many people bargained on.
It is also too early to predict where people will be spending their withdrawals.There are expectations that certain retail-focused companies might benefit in the short run due to consumers spending their withdrawals, but the exact impact is not easily quantifiable and thus doesn’t warrant a change in investment approach. Pension funds will have to sell assets to pay out withdrawals, but the timing thereof is less certain and, as long-term investors, there are a myriad of factors, including globally, that investment professionals will take into account.
Glamour: How can individuals make better-informed financial decisions in light of the new regulations?
Renee Coughlan: There is a vast amount of information available via member communications or on social media and online. Make sure you have up-to-date information from reliable sources to avoid misinformation.
Consider all the options available as well as the financial impact that each decision has. Look at alternatives and get expert advice from your retirement fund administrators if needed. Make sure you understand the impact of the withdrawal on your retirement savings goals. If you need advice, don’t hesitate to speak to your financial advisor.
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