The Two-Pot dilemma

It has been seven months since the implementation of the Two-Pot Retirement System and it has become increasingly important to address the implications of withdrawing from the savings pot. The government had forecasted that withdrawals would amount to an estimated tax revenue of R5 billion, but the actual figure announced during the 2025 Budget Speech was over double that at R11 billion. While this surge in withdrawals may benefit government revenue and help South Africans to just get ahead again, it raises significant concerns about South Africans' ability to secure their financial future and live comfortably at retirement.

Quick recap of the Two-Pot Retirement System

The Two-Pot Retirement System was implemented on 1 September 2024 and allows South Africans to easily withdraw a portion of their retirement savings before retirement. It has been designed to provide immediate financial relief while preserving most savings for retirement. The system is divided into two pots going forward, plus a third pot to cater for your legacy capital:

1. The savings pot will receive one-third of all contributions made after the implementation date. You can make one withdrawal per tax year from this pot, subject to a minimum withdrawal amount of R 2 000. Withdrawals from this pot are taxable at the individual’s marginal tax rate, up to 45%;

2. The retirement pot will receive two-thirds of all contributions made after the implementation date and it cannot be accessed until retirement;

3. The vested pot includes all retirement savings accumulated before the implementation date. You cannot make further contributions to this pot, but it will remain invested and subject to the previous regulation. This means you can access it on resignation and any withdrawals will be taxed according to the retirement fund withdrawal table (and not your marginal tax rate).

Let’s unpack the balancing dilemma using Thando as a case study

Thando is a 35-year-old packaging designer at a leading food retailer in South Africa. Her gross annual salary is R670 000, and she contributes 21.5% per annum to her retirement savings. This puts her in the 36% marginal tax rate bracket. We’ve assumed an annual salary increase of 5.5%, in line with our tax bracket assumptions, keeping her in the same marginal tax rate bracket until her planned retirement age of 60. Her retirement annuity value was at R1.72 million and her savings pot value at R30 000 when the Two-Pot Retirement System came into effect.

Long-term benefits of the Two-Pot Retirement System

Firstly, the two-pot system offers significant long-term benefits by ensuring that a substantial portion of retirement savings are preserved. If Thando invests her vested, retirement and savings pots in a multi-asset high equity fund and refrains from withdrawing anything until retirement, 82% of her total retirement savings at retirement will come from her retirement and vested pots – i.e. from the pots designed to preserve capital for retirement. This is illustrated in the chart below and highlights the system's effectiveness in protecting the bulk of Thando’s retirement assets.

Source: Morningstar

If you were closer than 25 years to retirement when two pot was implemented, your vested pot will make up a larger portion of your retirement savings, while if you were more than 25 years from retirement your retirement pot will be the largest at retirement.

Beware: Spending your savings pot comes with strings attached!

Withdrawing from the savings pot can have severe long-term consequences. Let’s quantify this using Thando’s journey again, this time assuming the multi-asset high equity fund she has chosen for her retirement savings will deliver an annual return of inflation + 5% over the 25-year period. In this scenario her vested and retirement pots will grow to R34.2 million, and:

• If she leaves her savings pot untouched it will add another R8.2 million to her retirement savings;
• If she empties her savings pot every year, she will only get R1.5 million of savings in her pocket over the 25-year period

Fully withdrawing her saving pot annually will thus result in a R6.7 million shortfall - R850 000 due to tax paid and R5.85 million due to the opportunity cost of not being exposed to the power of compounding until retirement.

Put differently, if Thando uses her full savings pot every year to cover annual shortfalls, she will retire with R 8.2 million less, which means she will earn 20% less per month in retirement income.

What does withdrawing today cost your future self?

Another way to think about withdrawing today, is how much your retired self will have less because of your withdrawal today. This is illustrated below as a cost to your retired self per R 1 000 withdrawn today.

Source: Coronation. Assumes a retirement age of 65 and a balanced fund growing at 12% per annum and inflation of 6%

Conclusion

The Two-Pot Retirement System requires a critical balance between immediate financial access and long-term retirement security. Early withdrawals should be a last resort and carefully considered due to their significant long-term impact. By staying invested and leveraging the power of compounding, South Africans can ensure a more secure and comfortable retirement.