Preserving your provident fund in the two-pot system

Why should I preserve my retirement savings?

South Africa’s two-pot retirement system gives you more flexibility when financial pressure hits. But even though you can access part of your retirement savings before retirement, withdrawing money early can reduce your future financial security.

According to a study by 10X Investments, only about 6% of South Africans can retire comfortably. One reason is that many people withdraw their retirement savings too early, leaving them with less money when they retire.

Preserving your retirement savings gives your money more time to grow through compound returns. This means you can earn growth not only on the money you invest, but also on the returns your investment generates over time. Leaving your provident fund untouched for as long as possible can help you build a larger retirement savings balance and improve your chances of a more financially secure retirement.

How does the two-pot system protect my retirement?

South Africa’s two-pot retirement system started on 1 September 2024. It was designed to help protect your retirement savings while still giving you limited access to money in emergencies.

The system splits your retirement contributions into separate components with different access rules:

• Savings pot: One-third of your retirement contribution goes here. You can access this once per tax year
• Retirement pot: Two-thirds goes here. You can only access this when you retire
• Vested component: Money saved before 1 September 2024 stays here under the old retirement fund rules

When the system launched, up to 10% of your vested component (capped at R30 000) moved into your savings pot. While the savings pot gives you access to emergency funds, most of your retirement savings stay protected in the retirement pot so you still have money available when you retire.

How does compound growth affect my retirement savings?

One of the biggest risks of withdrawing from your retirement savings is losing out on compound growth over time. Compound growth means your money earns returns, and those returns can then continue earning more returns. The longer your money stays invested, the more opportunity it has to grow.

For example:

• If you invest R1 000 every month for 25 years and leave it untouched, your retirement savings could grow to R950 000 at an annual return of 8%
• But if you make 3 withdrawals of R5 000 during that period, your savings could drop to around R900 000

That’s R50 000 less at retirement from withdrawing just R15 000.

Even smaller withdrawals can make a big difference over the long term because the money withdrawn no longer has the opportunity to grow through future returns. That’s why preserving your retirement savings for as long as possible can help improve your future financial security.

What tax and fees do I pay when I withdraw from my savings pot?

Accessing money from your savings pot may help during a financial emergency, but it’s important to understand the costs involved.

Tax implications

Withdrawals from your savings pot are taxed as ordinary income.

This means:

• SARS adds the amount you withdraw to your annual taxable income
• You pay tax based on your income tax bracket
• A larger withdrawal could increase the amount of tax you pay

This means the final amount paid into your account may be less than you expected.

Administration fees

Many retirement funds also charge admin or processing fees when you make a withdrawal. These fees are usually deducted before the money is paid to you, which can further reduce the amount you receive.

Before making a withdrawal, it’s worth understanding both the short-term costs and the long-term impact on your retirement savings.

How do I avoid unnecessary withdrawals from my retirement savings?

South Africa’s two-pot retirement system gives you access to emergency savings when you need it. But building healthy financial habits can help you avoid withdrawing from your retirement savings.

Practical ways to protect your retirement savings:

• Build an emergency fund separate from your retirement savings
• Review your budget regularly to better manage your monthly expenses
• Avoid withdrawing money for non-essential spending
• Speak to a financial adviser before making withdrawal decisions
• Use retirement calculators to understand the long-term impact of withdrawals

Can I move money from my savings pot to my retirement pot?

Yes. The two-pot retirement system allows you to transfer money from your savings pot into your retirement pot. Moving money into your retirement pot means it will stay invested until retirement, which can help grow your long-term retirement savings.

This may help you:

• Increase your retirement savings over time
• Benefit more from compound growth
• Reduce the temptation to make unnecessary withdrawals

This article is for general information only and does not constitute financial advice. Speak to a registered financial adviser before making retirement or withdrawal decisions.