When South Africa’s new Two-Pot Retirement System was introduced, it was celebrated for giving members security and choice. For the first time, members could take some of their retirement savings in times of need without resigning from their jobs. For many households under financial pressure, it was a much-needed relief.
But there is a downside, one that is quiet, slow, and unseen. When you withdraw from the savings pot, you might be helping yourself today, but you are taking away from your future self.
Two-Pot System explained
The system divides retirement savings into two pots: a savings pot (one-third, accessible yearly) and a retirement pot (two-thirds, available only at retirement). The retirement pot is protected; it is money that grows over time and is only accessible when you retire. This is the part designed to provide you with a steady income once you stop working.
Ideally, the money in both pots should remain untouched so it can continue to grow and provide the best possible future income for you. But if members face financial pressure and have no other option, they can withdraw from the savings pot.
Most retirement fund statements show members a lump sum. For example, you might see a figure like R1 million on your quarterly statement. That sounds like a lot, but it is important to understand what that amount means for your future self.
Look at the example below. Tyrone and Puleng both have a lump sum of R1 million, but the pension income they will receive upon retirement differs significantly.
To make sense of the lump sum, members can try trusted online retirement calculators. This can help show how a figure like R1 million translates into a steady future income. But it gets complicated. There’s a lot of math involved – ask your financial advisor, HR manager or retirement fund trustees to explain what your lump sum means for your future self.
Thinking about your retirement savings as a future monthly income makes it easier to plan and understand.
But what happens to this monthly income if you regularly withdraw from the savings pot? Every time you withdraw money, your future income is affected.
Let’s explain
Mina is 45 years old and earns R25 000 per month. She has retirement savings worth R1 287 500 (R6 250 + R31 250 + R1 250 000) – see her pots below. She contributes R3 750, which is 15% of her salary, to her retirement fund. If she continues in this trajectory, she is on track to receive a pension income of around R16 800 per month.
However, if Mina withdraws R10 000 from her savings account each year, that money will no longer be available to grow, with interest, over time.
Over 20 years, she could miss out on thousands of rands in growth. This could lower her monthly pension from about R16 800 to around R12 000, a noticeable impact on her quality of life in retirement!
This is the power of compound interest. It works silently in the background. Money left in the pot grows over time. Money taken out early does not.
So, before touching the savings pot, ask yourself: “Is this a true emergency, or is there another way?” Each withdrawal echoes into the future. It may feel like only
R10 000 today, but it can mean hundreds less in monthly income tomorrow.
Further reading
Save for a monthly pension instead of a pot of gold
Understanding the goal of the two-pot system
Sources
FSCA: Unpacking the fundamentals of the Two-Pot system
National Treasury: 2024 Two-pot System Updated FAQ August 2024
Old Mutual: Retirement Calculator – Am I saving enough? ; Two-Pot System – Retirement Reform Explained
The calculations were created with AI and are for illustrative purposes only – amounts may vary. Speak to your financial advisor before making any financial decisions.
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