Two-pot retirement system coming soon: Be aware of the pitfalls, warns expert

The Money Show's Bruce Whitfield talks retirement planning with consultant Bruce Cameron, co-author of 'The Ultimate Guide to Retirement in South Africa'. 

South Africa's two-pot retirement system is set to come into effect on 1 September.

In essence, the system will split a pension fund into an 'emergency pot' that's going to be accessible, while a bigger portion (two thirds) will continue to be locked away in retirement savings.

Its implementation is going to have an enormous impact on the economy warns retirement fund consultant Bruce Cameron, and we could see the investment market sinking and inflation going up

The biggest danger of the two-pot system however, is that you may never have sufficient retirement capital on which to retire financially secure Cameron says. This applies particularly if you use the system to its maximum extent.

"It should not be seen as a bank savings account – it is not."

Sketching the background to the concept, Cameron notes that only around 6% of people in the country retire with an affordable pension.

The idea was strengthened by what transpired during the COVID pandemic when people were underemployed or lost their jobs, with their only access to money being their retirement savings.

"The other big thing is, they said if you needed access you didn't want to leave your job to get your hands on the money, so they proposed this two-pot system with a savings scheme and a retirement scheme."

"It sounds all very good, but a lot of people - especially low-income earners, are going to find they're going to retire impoverished as they draw an amount from their savings every year), with no access to the state pension because they'll retire WITH money."

Bruce Cameron, Retirement fund consultant and author

Cameron shares his concerns in a piece published on retirementplanning.co.za.

Two-pot system alerts:  

• If you access retirement capital from your retirement savings account, you're unlikely to retire financially secure. (If you want the financial security, leave all your money in both the savings and retirement components; and on retirement, combine both components to buy a pension for life.)
• Any withdrawal from a savings account will result in being taxed at your marginal rate of tax. This means that your marginal rate could also increase. 
• If investment markets are negatively affected by the large-scale  withdrawals, and you withdraw late, you'll see a greater knock-on on your savings account when you withdraw as capital values decrease.

Cameron also has a specific alert for members of commercial retirement fund annuities (RAs), who he says will add to the once-off withdrawal and future withdrawals problems.

Until the implementation of the two-pot system in September he notes, RA savings cannot be withdrawn until retirement (at any stage after the age of 55).

"Now, at retirement, you can commute up to one-third of your retirement capital, with the first R550 000 being tax free; and, the remaining two-thirds being used to buy a pension for life." 

"From September, any amount you withdraw from the retirement ‘savings’ account will be deducted from the R550 000."

Bruce Cameron, Retirement fund consultant and author

For more detail, listen to the interview clip at the top of the article