One mistake that could cost South Africans over R1 million

Momentum Corporate’s head of asset consulting, Rob Southey, explained that around R60 billion has been withdrawn since South Africa’s new two-pot retirement fund system was implemented on 1 September 2024.

In a recent briefing to the National Council of Provinces, the National Treasury said the introduction of the two-pot system has been largely successful.

It has improved public engagement with retirement funds, exposing non-compliance by some employers, and ensuring better long-term retirement savings.

“While the new system faces some teething issues, including some administrative hurdles, monitoring and evaluation mechanisms are being applied to ensure its effectiveness,” Southey said.

The 2025 Revenue Laws Amendment Bill provides further corrections and technical changes to the system.

“This first year has offered some interesting insights into how members are responding to the new rules and what challenges still need to be addressed,” Southey noted.

Notably, initial concerns about widespread, frivolous withdrawals haven’t materialised to the extent that many expected.

In fact, data indicate that most withdrawals are being used to reduce debt, pay for education, and put down deposits on second-hand vehicles.

According to Southey, one of the most striking findings one year into the new system is the high rate of repeat withdrawals.

“Of those who withdrew funds when the new rules came into effect, typically more than 80% are repeat withdrawers, accessing their savings pot multiple times,” he said.

“This suggests that a segment of the population is relying on these withdrawals annually, likely for ongoing financial pressures rather than one-off emergencies.”

It appears that some individuals are using the withdrawals to pay down informal debt, such as payday loans, with the debt cycle often restarting the following month.

“The fact that most members are using funds for essentials suggests that the extensive communication efforts by financial institutions and the government have been effective,” he said.

Nasty surprise for South Africans

Southey noted that members of retirement funds appear to understand the implications of withdrawals. A sense of caution seems to have set in, with most people avoiding using the funds for luxuries.

Many retirement fund members who made early withdrawals were surprised by the tax implications, as they did not realise that they were taxed at their marginal tax rate.

Adding to the surprise, many people discovered that any outstanding SARS debt, like unpaid PAYE, will be seized from the withdrawal amount.

In response, SARS has made an online tax calculator available on its website to calculate the tax due based on the amount being withdrawn.

“National Treasury reports some hesitation around using the calculator due to concerns about providing personal information to SARS,” Southey explained.

Therefore, future iterations of the calculator may not require personal details in an effort to improve public confidence and understanding.

The National Treasury has opposed calls for tax-free savings withdrawal benefits, arguing that contributions to retirement funds are already tax-deductible.

“While low-income earners have limited tax implications, the National Treasury has acknowledged that some individuals will be pushed above their tax-free threshold when they make a withdrawal, thus creating a tax liability,” Southey said.

“For example, if somebody earning R80,000 annually withdraws R20,000, it will push their taxable income above the tax-free threshold.”

South Africans will lose millions

According to Southey, the most significant lesson, which is still being learned, will come when the first cohort of members who have withdrawn from their savings pot reaches retirement age.

“They may be surprised to discover exactly how much their tax-free cash lump sum at retirement has been reduced by their savings pot withdrawals,” he warned.

Someone who spends 40 years saving for retirement, starting at age 25 with a pensionable salary of R20,000, will have a retirement fund valued at R5.18 million (in today’s money) at age 65 if they have made no withdrawals.

However, if they withdraw their entire savings pot each year, the value of the investment at age 65 will be significantly lower, R3.44 million.

A 55-year-old who elected to opt in to the two-pot regime, with R2 million in their vested pot and a monthly income of R49,000, will retire at 65 with R4.41 million if they make no withdrawals.

However, if they withdraw their entire savings pot each year, they will retire with R3.97 million.

“For younger people in particular, the consequences of withdrawals are still years away and may not yet be fully comprehended,” he said.

Southey explained that a critical discussion needs to occur about whether members should have a different investment strategy for their savings pot compared to their retirement pot.

“While most funds currently maintain a single, long-term strategy for both pots, this may not be suitable for members who intend to make regular withdrawals from their savings pot,” he said.

He explained that a less volatile, money-market-type investment strategy might be more appropriate for these individuals.

However, the current complexity and a lack of administrative capability among some major fund administrators have hindered this conversation.

While communication and education must continue, they need to evolve. “The focus should shift from explaining the rules of the two-pot system to demonstrating the consequences of withdrawals through helpful scenarios,” he said.

“Using examples that show the long-term impact on retirement savings will be crucial to helping people make informed decisions.”

Given the issue’s complexity, Southey stressed that the importance of financial advice should not be underestimated.

“Advice needs to be accessible to all members, not just the wealthy. Fund trustees have a critical role to play here,” he said.

“Some funds have successfully implemented systems where they endorse specific financial advisers or advisory firms. This creates a layer of governance and accountability, ensuring members receive sound advice.”

While this adds a new responsibility for trustees, Southey said it’s a necessary step to protect members and mitigate the risks inherent in the two-pot system.

“While the first year has been a learning curve, the foundation of the two-pot system seems to be holding,” he said.

“The challenge now lies in anticipating future pitfalls and building a support structure that empowers members to navigate their retirement journey with confidence and foresight.”

Issued on Daily Investor by Kirsten Minnaar | https://dailyinvestor.com/south-africa/101696/one-mistake-that-could-cost-south-africans-over-r1-million/