According to the Eskom Pension and Provident Fund (EPPF), the currently considered two-pot system to restructure retirement savings to allow for limited pre-retirement withdrawal will encourage the preservation and accumulation of sufficient funds for when people retire.
The National Treasury’s proposal is that one-third of any contributions from the date of implementation should go into the accessible retirement fund account and the other two-thirds into an account that must be preserved until retirement.
“We share the belief that this two-pot system is a good attempt at preserving sufficient funds for when members retire,” says Ayanda Gaqa, Executive: Governance and Assurance at EPPF.
“It is important for South Africans to make an informed decision when thinking about using their retirement savings before actual retirement,” he adds.
Understanding the two-pot system
The two-pot system proposal was put forward to reduce the chances of employees eroding all their accumulated retirement savings during their working life, whilst at the same time catering for financial emergencies during their working life.
“The two-thirds will stay in the savings system for as many years of their (employee) working life, benefiting from the compounding effect of returns so that they have a reasonably sized pot that can be utilised to live off when they retire.
The second pot, which will be the one-third, is accessible to use for serious emergencies such as when Covid hit, and people faced the reality of losing their properties for example,” says Gaqa.
“When implemented, it will ensure that there will be consistent retirement saving and creation of a stable pot which will not be negatively impacted by withdrawals along the way. The one-third side of the pot you can access should there be any emergencies during your working life,” he adds.
“This prevents you from undoing your savings but only tap into a part of it if you need it, or at least try not to tamper with it so you can accumulate your whole pot until retirement time,” says Gaqa.
Current retirement system challenges
The current way in which the retirement savings system is set up is that other than death or permanent ill health, you can only access your retirement savings at retirement.
The other way is on resignation, which gives you access to the whole retirement savings which you could use to resolve financial difficulties or pay off some other form of debt.
Gaqa says, “If you are then fortunate to find new employment, it means that you will now be starting from scratch to save towards retirement and that alone can be a financial disadvantage towards saving for old age.”
The challenge is that most people change jobs several times during their working lives, if every time this happens, they withdraw all their accumulated savings, it leaves very little for them to live off later in life when they are no longer able to work or earn an income.
“Doing that, after the age 40 and above could set you back on your goal towards comfortable retirement if you have nothing else you are supplementing with,” explains Gaqa.
He adds: “Far too many people only realise much later in life that they have not saved enough and only scramble during the last ten years or so to accumulate something, unfortunately, this is usually not sufficient and leads to there being little to live off in old age.”
“A lot of wealth creation and accumulation in investing happens through time via compound interest – earning interest on interest over time. The last ten years is usually not enough to cover for the many years lost through withdrawals during the early working years,” he says.
What to do
Assuming the system is put in place in its current form, people should try not to access their one-third of the pot unless it is absolutely necessary.
Gaqa explains: “What we mean by that is we are mindful of extraordinary life realities such as the Covid pandemic. For someone who loses his or her income for months and months and has run out of their emergency savings, we then say instead of losing their house that might be a good enough reason to tap into their accessible pot because that is where they are most likely going to retire.”
What not to do
Using retirement accumulated savings for discretionary spending such as clothing accounts, credit cards, or holidays.
“For such expenditure, you need to do financial planning and prioritising your expenses. The need to pay those types of debts should come from the emergency savings pot, not from the retirement savings pot,” he says.
“If you have those types of debts, it means you may need to rearrange your financial affairs and prioritise, therefore budgeting helps a great deal. Do not allow yourself to incur excessive debt that your income cannot cope with,” Gaqa concludes.