Avo Solutions
By Hanli Buber, Avo Vision Head of Community Education
South Africa's National Treasury has proposed a significant change to the retirement savings landscape with the introduction of the "two-pot" policy. This reform aims to balance long-term savings with limited pre-retirement access to funds, potentially reshaping how South Africans approach retirement planning. The implementation of this system comes at a time when the South African economy is experiencing significant tightness, adding both urgency and complexity to the reform.
The ‘two-pot’ system was formally implemented on the first of September 2024. This system aims to balance the need for long-term retirement savings with the ability to access funds in emergencies.
The system divides retirement contributions into two components:
The Savings Pot: One-third of the contributions go into this pot. Members can access these funds before retirement in case of emergencies.
The Retirement Pot: The remaining two-thirds are allocated here. These funds are preserved until retirement and must be used to purchase a pension-providing product.
The policy aims to ensure that a significant portion of retirement savings is preserved until retirement, but also allows members to access a portion of their savings in times of financial distress without needing to resign from their jobs.
Given the current state of the South African economy, with rising inflation, overwhelming unemployment, sluggish economic growth due to infrastructure deficits and the lingering effects of electricity shortages, saving becomes crucial. Saving is important for financial security. It helps people cope with rising costs so that they can maintain their purchasing power. It helps to ensure future financial stability.
The impact of the tight economy has been that retirement savings have been significantly reduced. Contributions have become irregular. Economic hardship has led to an increase in early withdrawals from retirement funds. The retirement funds have not been performing as well as expected. Many households are also spending more than they earn, often by taking on more debt or by depleting their existing savings.
The two-pot policy has the potential to alleviate financial stress in a few ways: It gives people immediate access to funds for emergencies without having to resort to expensive high-interest debt. It enforces retirement saving and reduces financial anxiety. It should also prevent employees from resigning from their jobs to access their retirement funds.
The potential negative impact of the two-pot system is that it may affect people’s future financial security. Their retirement savings will ultimately be reduced, and reduce further every year, because many will take out whatever they can each year. The withdrawals will not always be for emergencies, but because of poor spending habits.
The potential risk of the two-pot system is a further and inevitable shortage of people’s wealth for retirement, because a third of people’s retirement saving will get used before they retire, reducing financial security. The reality is that the South African culture of poor retirement saving is most likely to continue. On the bright side, some people might be willing to start saving into a retirement vehicle now, because they know they can get at some of their money before they retire.
Looking at what has been happening since the first of September, the withdrawal activity within the first month has been frenetic for fund administrators. The figure is around six billion Rand withdrawal applications in the first three weeks. SARS is the biggest winner, getting on average probably 20 to 25% of that in tax payments.
Due to the high demand from consumers to access their savings, there have been delays in payments. Some members are having to wait a long time to be paid out because their retirement funds are experiencing liquidity issues, especially during the initial implementation phase.
The two-pot system is exposing some other disturbing realities. Some members have already been horrified to discover that their pension fund money is not actually there to withdraw. A couple of hundred million Rand of ‘missing funds’ have been unearthed already. This happens when an employer deducts funds from an employee but does not pay the money across to the fund administrator, either due to inefficiency or because the company is spending the funds itself. It can also happen when the fund administrator, who has received money from the employer, does not pay it across to the asset manager or the insurance benefits provider.
This will result in some further industry and legal actions, and sleepless nights for the consumers involved.
The upside is that banks will have some loans reduced and the economy will benefit tremendously, because even though these withdrawals are supposed to be for emergencies, most of them will simply be for wanting to spend money. With the expectation of 50 to 80 billion Rand of withdrawals in the first year, SARS and the economy will smile.
While South Africa’s two-pot policy offers a more structured and balanced approach compared to other international models, particularly those implemented during economic downturns, it is not fool-proof. It aims to provide some immediate financial relief, while ensuring that a portion of people’s long-term retirement savings are preserved. The effectiveness of the system will depend on how well it can mitigate financial stress without leading to excessive withdrawals that could undermine retirement security.
It is super-important for all South Africans to understand the benefits, risks and limitations
of the two-pot policy. Education and awareness are crucial for its success.
The kinds of strategies people could implement to protect themselves financially and optimise their retirement savings under the new system, include:
This last point is important. People should attend workshops, read articles, ask experts and make sure that they do what it takes to stay informed. Employers can play a significant role in the financial education of their employees. Employers must encourage their employees to participate in financial literacy workshops or seminars to enhance their knowledge and skills in managing their finances. Understanding the two-pot system and how it works can help people make better decisions.
Education helps individuals understand the structure and purpose of the two-pot system, including how contributions are divided and the implications of accessing the savings pot. Educated members are more likely to make informed decisions about when and how to access their savings, balancing immediate needs with long-term retirement goals. Education can guide individuals to use the savings pot responsibly, ensuring that withdrawals are made only for genuine emergencies.
Avo Vision has designed specific training content to train consumers on the two-pot policy and its implementation. Our field trainers have already reported that their participants have changed their minds about accessing their savings pot after realising what the detrimental long-term implications are of doing so. Understanding the tax implications of withdrawals can also prevent individuals from facing unexpected tax burdens, which could further strain, instead of alleviate, their financial stress.
Educating people to balance short-term needs with long-term savings is crucial for long-term financial stability. Avo Vision field trainers regularly conduct consumer financial education workshops and online webinars that focus on the importance of long-term savings. They explain and illustrate the sometimes-dire consequences of prioritising instant gratification and short-term needs.
In our training workshops, our trainers share personal stories, and case studies of individuals who have successfully balanced short-term needs with long-term savings, highlighting positive and achievable outcomes. They also tell the real-life stories of what happens if you do not manage your money responsibly.
Apart from training, public campaigns and social media awareness drives, individuals must be encouraged to seek advice from financial advisors who can provide personalised strategies based on their unique financial situations. Financial support groups could also offer support to individuals where they can share experiences and strategies for balancing short-term and long-term financial goals. Financial literacy should also be integrated into school curriculums to instil good financial habits from a young age.
Long-term, the two-pot system is expected to increase household disposable income significantly, which can stimulate consumer spending, contributing positively to economic growth. This modest boost can help counteract some of the economic challenges the country faces, such as slow economic growth and high unemployment.
By providing a structured way to access retirement savings in emergencies, the two-pot system may reduce the need for high-interest debt, which often exacerbates people’s financial difficulties. However, if consumers are not educated on how to manage their money better, there is still a risk that they may access their savings pot, and once that is depleted, they will have to take out high interest loans anyway.
A significant portion of the population may not fully understand the implications of early withdrawals, leading to premature depletion of their savings. Mandated benefit counselling and financial education programmes can help members make informed decisions about accessing their savings.
By regularly monitoring and evaluating the system’s impact to identify and address any emerging issues and by putting appropriate safeguards in place, the two-pot policy may achieve its goals of providing financial flexibility while ensuring long-term retirement security for South Africans. To ensure the best outcome of the implementation of the two-pot system, I am ultimately in favour of continuous financial education programmes. Financial education can help individuals make better financial decisions and live bigger lives, whether they access their savings pot or not.
