
Two-Pot: Opportunities, challenges, and early adoption
On 1 September 2024, South Africa introduced the long-anticipated Two-Pot Retirement System, marking a groundbreaking shift in the country’s retirement savings framework. Designed to provide individuals with greater financial flexibility, the system uniquely balances long-term financial security and short-term liquidity needs.
The following article, “Navigating the Two-Pot Retirement System,” provides more information about how this new system works, its implications for investors and key considerations.
South Africans dip into their retirement savings
The new Two-Pot structure allows individuals to maintain a safety net for immediate financial needs while safeguarding most of their retirement savings.
In a statement released by the South African Revenue Service (SARS) in mid-October 2024, over 1.2 million South Africans applied for a tax directive under the new Two-Pot system, with 1.14 million applications approved. As of early October 2024, a staggering R21.4 billion had been paid out under the scheme, illustrating the demand for more accessible retirement savings. However, while these withdrawals offer financial relief, they also present challenges.
Given South Africa’s economic climate and the financial hardship many citizens face it almost comes as no surprise that the bulk of these funds (R21 billion) has been used to address pressing needs such as home repairs, car expenses, and short-term debt.
A survey conducted by Discovery Corporate and Employee Benefits revealed that[1]:
- 24% of claimants used their withdrawals for home or car expenses.
- 21% paid off short-term debt.
- Surprisingly, 20% of withdrawals were allocated to education costs, likely for school fees.
- Another 11% went toward day-to-day expenses, underscoring the financial pressure many households face due to the rising cost of living.
Exhibit 1 | Reasons claimants accessed their Two-Pot savings
Source: Discovery Corporate and Employee Benefits “Reasons why claimants withdrew from their two pot savings component (using Whatsapp) (16 to 27 September 2024). Published 3 October 2024. For illustrative purposes only.
These figures highlight the strain South Africans are under, with many using their retirement savings to meet immediate financial needs rather than leisure or luxury.
R21 billion boost for the South African economy
The R21 billion injected into the economy is creating opportunities across multiple sectors. Retailers, in particular, are thriving as individuals use their withdrawals to cover essential needs like household goods, home repairs, and clothing.
For example,
- The Lewis Group, a leading credit retailer of household furniture and appliances, has seen its share price soar by 60.5% from 1 January to 17 October 2024, reflecting strong consumer demand.
- Similarly, Mr Price has surged by 66.9%, and
- Truworths recorded an impressive 44.6% growth, as consumers spent on clothing and household essentials, driving robust performance in the retail sector.[1]
Financial institutions have also seen an uptick in activity as individuals use their withdrawals to settle debt, benefiting banks and financial services companies listed on the JSE Financial 15.
SARS is also benefitting from much-needed tax inflows
While retirement contributions remain tax-free, any withdrawals from the Two-Pot system are subject to tax. SARS reported that as of October 11, 2024, approximately R21.4 billion had been paid out to more than 1 million applicants. These withdrawals are taxed at the individual’s marginal tax rate, with a minimum marginal tax rate of 18%. Based on these figures, SARS has likely generated at least R3.85 billion in tax revenue, with this number expected to grow significantly as more withdrawals are processed. Notably, any outstanding debt to SARS will be deducted from the withdrawal amount.[1]
Who is withdrawing?
According to the abovementioned Discovery statistics, withdrawal patterns vary based on age and income. Individuals between 35 and 45, have been the most active in accessing their savings, making up 27% of total withdrawals. This age group, often referred to as the “sandwich generation,” faces the dual responsibility of caring for young children and ageing parents.
Income level also plays a role, with low to middle-income earners being the most likely to withdraw. In fact, over 40% of middle-aged individuals with a low to medium income (earning less than R500,000 per year) have opted to withdraw funds. Conversely, higher-income earners, especially those over 55, are less likely to access their savings early.[1]
Guidance is key to long-term success
While the early withdrawals have been lower than expected, with only 22% of eligible individuals tapping into their savings, financial experts encourage restraint[1]. Consumers are encouraged to seek and speak with a qualified financial adviser to assist them in understanding the long-term implications of withdrawing from their retirement funds. Withdrawing now may mean higher contributions later or a significant reduction in future retirement savings.
Looking ahead, there may be spikes in withdrawals around major spending periods, such as Black Friday and the holiday season, but the overall trend suggests that most South Africans understand the importance of preserving their savings for genuine emergencies.
South Africa’s Two-Pot Retirement System has ushered in a new era of retirement savings management, providing flexibility while preserving long-term financial security. However, as early outcomes demonstrate, careful guidance is essential to ensure that individuals do not jeopardise their financial future by withdrawing savings prematurely. As the system matures, monitoring these trends will be crucial in shaping policy and advising South Africans on the best ways to balance immediate needs with their retirement goals.
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Sources :
*South African Reserve Bank (SARB), 2024. Statement of the Monetary Policy Committee: September 2024.
**Source: Borio, C. and Gambacorta, L., 2017. Monetary policy and bank lending in a low interest rate environment: diminishing effectiveness? Journal of Macroeconomics, 54, pp.217-231.
Federal Reserve Bank of Chicago, 2014. Monetary policy and low long-term interest rates. Chicago Fed Letter No. 324, July.
Russell Investments, 2023. How low interest rates impact investors.
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