Two-Pot: Show me the Moola!

South Africa's retirement savings are getting a shake-up with the launch of the two-pot system on September 1st, 2024. It's a big change and many are waiting in anticipation. The two-pot system aims to bring some financial relief whilst promoting healthy retirement saving. Most South African are aware that they will be able to access a portion of their retirement savings, but most are unaware of the impact on their long-term financial wellbeing and potential tax consequences.

Let’s look at what the long-term impact could be for someone who chooses to annually withdraw their savings pot balance.

For example, Thabo is a 35-year-old individual with R300,000 invested in his retirement fund. Following the implementation of the two-pot system, Thabo’s fund balance will be split, with R270,000 remaining in the vested pot and R30,000 going to the savings pot. For the next 30 years Thabo continues to contribute 12% of his R30,000pm salary to the retirement fund.?

Thabo, however, has a passion for cars, fast cars. Tempted by his desire to purchase a new car, Thabo decides to withdraw his savings pot on 1 September to help purchase his new dream car. He will have to pay tax on the R30,000 withdrawal according to his marginal tax rate. He will pay R7,800 tax and get R22,200 into his bank account. Thabo is not too worried by the tax and unaware of the long-term ramifications, he is more than delighted that he can now access a portion of his previously inaccessible retirement savings to put towards the car.??

Now let’s assume that every year until retirement Thabo has some new car, holiday, or emergency to pay and so he keeps withdrawing the balance of his savings pot every year until he reaches retirement.??

The consequence of these annual withdrawals becomes apparent when considering Thabo’s eventual retirement savings balance at age 65. Had Thabo refrained from annually withdrawing from his savings pot and instead allowed it to grow alongside the vested and retirement pots, he would have a balance of R R13,295,916. However, by succumbing to the temptation of annual withdrawals, Thabo’s retirement savings are reduced by R3,727,586 (that’s a few cars) and will be worth only R9,568,330.?

The implications of these findings underscore the importance of disciplined savings habits. While the allure of accessing funds from the savings pot may be enticing, individuals must consider the long-term consequences of their actions. The intention of the savings pot is for people to access a portion of their retirement savings for severe financial emergencies.

A retirement fund member will only be able to access their savings once a year, so it is highly recommended to only access the funds when it is really needed. ?

Looking at Thabo’s scenario, we can see many questions that South African’s face in the build-up to the launch of two-pot system. How much can I access at launch date? ?What are the tax implications? ?How will this impact my retirement when I get to 65? ?

We have put together a few easy-to-use calculators to help you navigate these questions and further understand two-pot. These calculators will help you to make informed decisions about your retirement future.

Head over to our website https://benefitcounsellor.com/two-pot to access these free calculators and to keep up to date with the latest developments and timelines concerning the two-pot system.

Calculation assumptions: Age 35, Annual salary 360,000, contribution rate 12%, Salary inflation 6%, Inflation: 6 %, Investment return 8%??