What the two-pot retirement system may mean for your retirement plans
Ronald King, Head of Public Policy and Regulatory Affairs at PSG Wealth
Times are tough. And National Treasury are worried that rising financial pressure could see people increasingly resigning from jobs in order to access a portion of their precious pension or provident fund savings.
To combat this, Treasury has released a set of draft reforms for comment around introducing a ‘two-pot’ system for retirement savings that will grant members of retirement funds access to one-third of their pension savings once a year, in an emergency – while preserving the other two-thirds for retirement.
“While this may seem like a good way to access much needed cash in a dire situation, if these regulations came into effect, we would advise people to think very carefully about the longer terms impacts of tapping into precious retirement savings,” says Ronald King, Head of Public Policy and Regulatory Affairs at PSG Wealth.
King says it is important to note that the one third pot that you can access will only be created in March next year and will effectively be empty. “You will therefore only have access to one third of your future savings.
It is also important to note that any withdrawals from the one third pot will be taxed at your marginal (highest) tax rate and the ins and outs of how this will impact the sum that you have when you eventually retire is a worthwhile discussion to have with your financial adviser before making any decisions.
“The number of South Africans who can afford to retire comfortably is already worryingly low and any withdrawal from these savings could impact this further,” says King. “It also happens quite often that people use these funds to pay off debt only to get indebted again, thereby ending in the same financial distress, but with no long-term savings left,” he adds.
But he concedes that an emergency is an emergency, and one needs to have cash to access in cases like this. “This is where the value of a good financial plan comes in – working with an adviser to make sure that you have emergency funds available when you need them but with as little impact on your longer-term savings as possible.”
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