OPINION: What the two-pot system means for SA’s retirement landscape

By Nzwananai Shoniwa, Managing Executive at Sanlam Corporate and Koketso Mahlalela, Head of Member-led outcomes

The success of South Africa’s newly implemented two-pot retirement system hinges on the country’s workforce receiving effective financial education. Recent data from Sanlam’s Benchmark 2024 research reveals that members’ awareness of the new system grew from 52 percent in 2022 to 59 percent in 2024. But there’s still work to be done.

Naturally, members will be tempted to access retirement savings prematurely. So, organisations should focus on informing employees about the long-term implications of withdrawals, including potential tax burdens and compromised retirement security, to help them make informed decisions. Doing so will help individuals balance short-term needs with their future financial well-being.

Why South Africans are withdrawing their retirement savings

At its core, the two-pot system aims to provide financial relief to struggling South Africans while ensuring long-term retirement security. Sanlam’s Benchmark research, conducted before the new system’s implementation, reveals that the number of individuals opting to cash out all their retirement funds when changing jobs increased from 37 percent in 2023 to 50 percent in 2024.

Of those who accessed their funds, 33 percent indicated it was to cover their living expenses, while 21 percent said the money would be used to reduce or settle their debt entirely. Nearly 30 percent used the funds for other purposes, including travel, starting a business or assisting family members.

Now, with the system in place, we’re seeing these intentions translate into action, reflecting the pent-up financial needs of many South Africans. Our research reveals that the number of individuals planning to cash out funds from their savings component jumped from 31 percent in 2022 to 59 percent in 2024. This surge underscores the financial pressure many individuals feel, and their struggle to make ends meet in an increasingly challenging economic environment.

These findings highlight a critical need for financial education and support. While the two-pot system provides flexibility, withdrawals must be made judiciously.

Misconceptions about the two-pot retirement system

The purpose of the vested component is to protect members’ rights that were in place prior to September 1, 2024. Members will continue to have the same rights to access their retirement benefits on resignation, retrenchment or dismissal after 1 September as they currently do. Any withdrawals from the vested component prior to retirement will still be taxed according to the withdrawal benefit tax table where, currently, only the first R27 500 is tax-free.

The same annuitisation requirements will continue to apply at retirement to benefits in the vested component as well as the retirement pot. At retirement, the cash lump-sum withdrawal of up to one-third of a member’s savings will still be taxed according to the retirement fund lump-sum benefits table. Currently, the first R550 000 is tax-free.

From September 1, one-third of a member’s contributions will be allocated to the savings component, and two-thirds to the retirement component. This split is compulsory across all funds that qualify for the two-pot system. Some people have misunderstood the cap of

R30 000 on the seed capital to be the maximum annual withdrawal from the savings component. However, there is no maximum withdrawal.

The savings component will continue to grow as one-third of the contributions are added to it, and investment returns are earned on these contributions. Members can withdraw whatever is in the savings component, subject to the R2 000 minimum. Members are also only permitted one withdrawal per tax year, not a calendar year. The tax year starts on March 1 and runs to the end of February.

What members should consider about tax implications

One aspect of the two-pot system that requires careful attention is its tax implications. Many retirement fund members may not fully grasp how withdrawals from their savings component will impact their tax situation, potentially leading to unexpected financial burdens.

Under the new system, withdrawals from the savings component are added to an individual’s taxable income for the year and taxed at their marginal rate. Therefore, a withdrawal could push someone into a higher tax bracket, resulting in a larger-than-expected tax bill.

For example, if an individual with an annual salary of R370 000 (falling in the 31 percent tax bracket) withdraws R100 000 from their savings component, their annual taxable income would increase to R470 000. This could push a portion of their income into the next tax bracket (36 percent), resulting in a higher overall tax liability.

Moreover, members must understand that SARS will deduct any outstanding tax debt from the withdrawal amount before they receive it. This could significantly reduce the amount received, potentially defeating the purpose of the withdrawal for those in dire financial distress.

Two-pot cautionary lessons from Chile

Chile’s experience offers crucial lessons as we navigate our Two-pot system. Chile’s pension crisis began when the government allowed workers to withdraw their retirement savings during the COVID-19 pandemic. Members made one withdrawal annually for three years, leading to people cashing out a quarter of pension assets ($49.9 billion).

The consequences of Chile’s early pension withdrawals were far more significant than anticipated:

*Chile experienced a substantial spike in inflation during 2021, which the Central Bank directly attributed to the pension withdrawals.

*The sudden influx of cash into the economy also led to a surge in household spending that exceeded pre-pandemic levels. This created severe inflationary pressures that affected the nation’s purchasing power, not just those who withdrew funds.

*Chile experienced an unexpected impact on currency valuation. The Chilean peso weakened considerably following the pension withdrawals, further fueling inflation.

The long-term consequences of early withdrawals for individuals in Chile were also dire, reducing pension balances by 24.3 percent for men and 33.3 percent for women. This required 5.6 and 6.3 years of additional contributions, respectively, to recover to the pre-withdrawal level.

What’s particularly concerning about Chile’s experience is the compounding nature of these effects. The increased spending and weaker currency created economic challenges that

extended far beyond the immediate relief the withdrawals aimed to provide. For instance, Chile saw a credit downgrade in 2020, partly due to these pension fund outflows.

Chile’s experience shows us that what members consider a solution to short-term financial pressures can create long-lasting economic problems. That’s why organisations should help members carefully balance the need for financial flexibility with the imperative of maintaining economic stability.

A call for collective responsibility

As we stand in these early days of the two-pot retirement system, it’s the collective responsibility of all stakeholders – government, employers, financial institutions, and individuals – to approach this new system with a sense of shared responsibility and long-term vision.

This two-pot system offers a lifeline to those facing genuine financial hardship while introducing a mechanism for compulsory preservation that could, in the long run, help close the retirement savings gap. However, its success will depend on organisations encouraging South Africans to approach this newfound flexibility cautiously, ideally seeking professional financial advice before withdrawing.

By fostering financial literacy, encouraging members to manage their retirement savings responsibly, and maintaining a long-term perspective, we can turn the two-pot system into a powerful tool for building a more resilient South Africa where financial security in retirement becomes a reality for all individuals.

*Shoniwa is a Managing Executive at Sanlam Corporate and Mahlalela is the Head of Member-led outcomes.