Denver Keswell, Senior Legal Advisor, Nedgroup Investments

National Treasury has indicated that it intends to consult on whether limited access to the retirement component (the preserved pot) should be permitted in cases of severe financial distress, potentially where individuals have no employment income, UIF benefits or other sources of support. This proposed discussion reflects the acute financial pressure facing many households, underscored by the significant volume of withdrawals from the savings component since the two-pot retirement system was introduced.

From an asset management and fiduciary perspective, we need to separate short‑term liquidity relief from long‑term financial health, and we must not confuse “cashflow relief today” with “solving indebtedness”. The financial plight facing many people is real because retirement fund members may have already used their savings pot but still have money preserved in the retirement pot, but no longer have income or UIF support. The concept of strict, conditional access is therefore aimed at preventing destitution in those extreme cases.

There is evidence that a material portion of two‑pot withdrawals has been used to pay down debt, at least initially. An analysis by the Bureau of Market Research found declines in overdue balances in certain retail credit categories after peak withdrawals, indicating that consumers did use the liquidity to settle arrears. Industry commentary from large administrators likewise shows “pay down debt” as the top stated use in many datasets.

The two‑pot withdrawal system was introduced to reduce the destructive behaviour of resigning purely to access retirement savings. If targeted hardship access is carefully designed, it may reduce pressure to find other (often worse) ways to unlock preserved savings.

However, BMR’s research shows that even after people take money out of their two-pot savings, the total amount is very small compared to all the money borrowed by households. So, even if many people withdraw savings, it doesn’t make a big difference in reducing overall household debt.

While paying off overdue debt with money from the two-pot system helped some people get caught up for a little while, BMR nevertheless found that in some cases, those debts went up again later. This shows that using savings to fix arrears is often a temporary solution and does not make people financially stable in the long run.

There are suggestions that withdrawals were sometimes used to support new credit‑based purchases, including spikes in used‑vehicle registrations aligned with the withdrawal period, essentially converting retirement liquidity into a deposit for financed consumption.

Impact on retirees’ ability to afford retirement — the harm is predictable and compounding

The retirement pot exists for a reason: it is the portion intended to preserve long‑term capital and convert it to income at retirement. However, allowing hardship access to the retirement component creates a direct trade‑off:

• Every rand withdrawn now is a rand that won’t compound for years (or decades).
• Members who withdraw are mathematically worse off at retirement because they reduce the base that would otherwise grow and ultimately fund income.
• Already, industry data shows that many withdrawals are made by members whose projected retirement adequacy is already weak, and repeated withdrawals are becoming a pattern.

This is why the industry is worried—not just because of beliefs or opinions, but because the numbers show that taking out retirement savings now will leave people with less money when they retire. Once you allow leakage from the retirement pot, you reduce retirement adequacy and increase old‑age vulnerability.

The tax reality — withdrawals at marginal rates can create a “double loss”

Another point to consider is that two‑pot withdrawals from the savings component are taxed at the member’s marginal tax rate, which is meant to be punitive. Practically, this matters for hardship access to the retirement pot because you lose capital to tax immediately. Members are often surprised by the tax bite. There is consistent reporting of significant tax collected on withdrawals, reinforcing that the immediate relief is frequently less than the gross amount members expect.

Secondly, you will lose long-term growth on the taxed amount. Tax is not just a reduction in today’s cashflow; rather, it is a reduction in the investable amount that would have compounded for retirement. In financial distress cases, marginal rates can still be punitive. This is because even where income is lower, “marginal rate” taxation can produce outcomes where the member’s net cash received is materially reduced, especially were tax directives, outstanding liabilities, or timing issues bite. This means hardship access can deliver less relief than expected, while still causing a permanent reduction in retirement capital.

If Treasury allows further limited access to the retirement component, the design must be exceptionally tight because the second‑order consequences are predictable. Encouragingly though Treasury itself has already signaled that any access would need strict conditions to avoid undermining progress.

From a prudential/legal risk lens, any hardship mechanism should at minimum include:

• Clear qualifying triggers, such as retrenchment, exhaustion of UIF or verified means test.
• Cooling-off / waiting periods to prevent immediate or opportunistic access.
• Mandatory guidance/disclosures: to reduce behavioral harm — because repeat withdrawal behaviour is already emerging in the savings pot.

There is no proof that long‑term debt levels are falling because of two‑pot access. The evidence shows temporary arrears relief, but no sustained balance‑sheet repair at scale — and in some cases, the liquidity simply re-enters the credit cycle.

It is also unknown whether those who access retirement funds before retirement will be in a worse position at retirement (purely from the value of that retirement fund benefit at retirement), because they permanently reduce preserved capital and its compounding effect — while also suffering an immediate tax haircut at marginal rates.

ENDS