The impact of withdrawing from your Savings Pot under the Two-Pot Retirement System.

With the new Two-Pot Retirement System now in effect as of 1 September 2024, you might consider tapping into your retirement savings for the first time. As tempting as it is to access this tangible amount of your hard-earned retirement savings, have you considered the impact it would have???

A wealth of information is available on how this system works, including Gurschulle Neethling’s article, “Two-Pot Retirement System Simplified”, which highlights the false sense of time to make up what you withdraw and, being intentional around increasing your retirement savings at some stage. Gurschulle’s article is a handy resource for a refresher and provides real-life scenarios of how early withdrawal can impact your lifestyle when you retire.??

In my article, I want us to delve deeper into how making Savings Pot withdrawals could impact your retirement savings. We will do this by exploring a few scenarios. Please note that the examples given are assumption-based and summarised at the end of this article.?

Scenario 1: Sam?

Sam is currently age 35 and has accumulated R 250,000 in her retirement savings. She contributes R 1,400 each month and wishes to retire at age 60.?

• No Withdrawals: If Sam continues contributing over the next 25 years without making any withdrawals, she will have R 1.15 million (in today’s terms) by retirement.?

• Once-off Withdrawal: On 1 September 2024, Sam had R 25,000 seeded to her Savings Pot. If she withdraws this R 25,000 and never withdraws again, her future retirement savings will reduce by R 52,000 and she will retire with R 1.09 million.?

• Annual Withdrawals: If she claims R 25,000 on 1 September 2024, and then everything available in her Savings Pot in every tax year thereafter, her future savings will reduce by R 260,000 to R 890,000. This is more than 20% less than what she could have retired with, if she didn’t make any withdrawals.?

Scenario 2: Jimmy??

Jimmy plans to retire in four years and four months at age 63. He has saved R 4 million towards retirement and contributes R 10,000 monthly. ?

Jimmy has additional considerations that he needs to keep in mind.? He was 55 with the implementation of "T-Day" (the previous retirement reform), which took place on 1 March 2021. This means special rules may apply to Jimmy regarding the Two-Pot Retirement System. Please see our Two-Pot FAQ, which explains how individuals - like Jimmy - might be impacted and the different outcomes resulting from these retirement reforms. ? ?

What would happen to Jimmy's retirement savings based on his exposure to "T-Day" and the layered implementation of Two-Pot? The following will be the likely outcome for Jimmy if he chose to participate in Two-Pot from 1 September 2024:? ?

• No Withdrawals: If Jimmy continues along this path, he will retire with R 5.10 million in (today’s terms).??

• Once-off Withdrawal: On 1 September 2024, Jimmy will have R 30,000 seeded to his Savings Pot. If he withdraws this amount only, with no further withdrawals, he will retire with R 5.07 million.??

• Annual Withdrawals: If Jimmy decides to withdraw the available sum from his Savings Pot annually thereafter, he will lose R 180,000 by the time he retires with only R?4.92?million.??

Scenario 3: Sarah??

Sarah is still early in her career and has accumulated R 150,000 to date. She is 25 and wishes to retire at the age of 65. Currently, she is contributing R 2,500 per month to her retirement savings.?

• No Withdrawals: If Sarah continues contributing without any withdrawals from her Savings Pot, she will retire with R 2.79 million (in today’s terms) in 40 years.??
• Once-off Withdrawal: On 1 September 2024, Sarah will have R 15,000 available in her Savings Pot. If she claims this R 15,000 but does not make any future withdrawals, she will reduce her retirement savings by R?52,000 and retire with R 2.74 million.??
• Annual Withdrawals: If she claims everything available from her Savings Pot over the next 40 years, she will retire with R 1.97 million. This is R 820,000 (around 30%) less than if she does not withdraw any money from her Savings Pot.?

?Further considerations??

It’s important to note that the amounts withdrawn from the Savings Pot in each scenario above will be subject to tax at individual marginal tax rates. The marginal tax you pay on your Savings Pot withdrawal can significantly impact the final amount you can put in your pocket.? To see the impact of tax on your withdrawal, you can refer to the SARS Two-Pot Retirement System Calculator.??

Another element referenced in Gurschulle's article is a potential fee to withdraw from the Savings Pot. Depending on your provider, it may either be deducted from your withdrawal amount or from your remaining retirement savings, which can also negatively impact your retirement outcome.??

Your options at retirement?

Upon retirement under the Two-Pot Retirement System, a member can withdraw 100% of their Vested benefits and up to one-third of their Non-Vested benefits as a cash lump sum, subject to tax, while the remaining two-thirds of the Non-Vested benefits must be used to purchase an annuity.??

Your Vested and Non-Vested benefits, also known as you Vested Component, consist of the money you have accumulated up to 31?August 2024, less the amount that was seeded to you Savings Pot.?

Benefits in the Savings Pot can be taken as a cash lump sum or transferred to the Retirement Pot for an annuity.??

The Retirement Pot benefits must be taken as an annuity unless the combined interest between the Retirement Pot and two-thirds of the Non-Vested benefits in the Vested Component are below R 165,000.??

Cash lump sum benefits are taxed according to the lump sum retirement tax table, with the first R 550,000 tax-free, while annuity income is taxed at the member’s marginal rate.?

Conclusion??

The Two-Pot Retirement System offers an attractive opportunity to access retirement savings early. Still, it is crucial to understand and consider the long-term impact on your financial future before withdrawing from your savings pot. Each withdrawal, whether one-time or annual, significantly reduces the amount you will have at retirement. Careful consideration and planning are essential to ensure you make the best overall financial decision, keeping your retirement goals in mind.???

Assumptions and Disclosures:??

• The projected figures approximate the outcomes based on the assumptions listed below.??

• We calculated this Investment growth at a real rate of return of 3% per annum.??

• Thus, the projected figures are in real terms, disregarding the effect of inflation to help you compare the effects with consideration of what that money is worth today.??

• We have not considered increases in future contributions or additional contributions in these examples.??

• Contributions are received at the start of the month.??

• The first Savings Pot withdrawal is made on 1 September 2024 before the contribution is received.??

• The second and subsequent Savings Pot withdrawals are made on 1 March annually, from the total balance available in the Savings Pot at that date.??

• No other withdrawals are made from retirement savings.??

• Fees and taxes associated with the Savings Pot withdrawal are unaccounted for.?

Article credits:

Thank you to Zandri Vermeulen for assisting with the scenario planning.??