As we navigate the complexities of retirement planning in today's financial landscape, the now fully-fledged Two-pot System has sparked significant debate.
While the concept may initially seem appealing - offering increased access to retirement savings - it is essential to consider the long-term implications of this newfound flexibility. Here at GTC, based on members’ responses to our communications, we have observed a growing inclination among retirement fund members to tap into their retirement savings for everyday expenses rather than considering these withdrawals as a last resort.
Our thorough approach at GTC involves comprehensive counselling with clients applying for withdrawals under the new system. We believe this initiative is not just a service but a necessary (and regulated) educational effort that helps safeguard financial futures. During these engagements, we found that many individuals are not sufficiently examining their monthly budgets, opting rather to utilise their retirement savings for everyday costs - school fees, streaming services, gourmet coffee - expenses that belong in a household’s monthly budgeting and which should not be mixed in with long-term savings.
While there are indeed legitimate circumstances that may require - or justify - an early withdrawal, such as unexpected medical expenses or the death of a primary breadwinner, or indeed the ability to purchase one’s own home for the first time, relying on retirement funds for routine costs undermines the principles of compound interest and long-term investment growth. The allure of immediate gratification can be tempting, but it is hardly a strategy for prudent retirement planning.
GTC’s counselling efforts have yielded positive results, encouraging and educating members to appropriately consider their financial strategies. Even when the need for a Two-pot withdrawal was valid, members concluded their counselling better informed about the consequences of their decisions. Though early days, GTC is optimistic that its Two-pot claims ratio will be lower than the industry average attributable largely to this counselling engagement.
The Two-pot system marks a significant shift in the Government’s attitude to retirement fund preservation. Since the early ’80’s when the Government aborted the Preservation of Pensions Bill, there have been no regulatory changes as regards retirement fund preservation. Consequently, many South Africans have used the only alternate mechanism of accessing their retirement funds before retirement by resigning, opting to have their retirement fund paid out after tax, in cash.
In complete contrast with the previous desire to ensure retirement fund preservation, Government first mooted the idea that members could access their retirement savings during their working career, following the economic fallout of the Covid-19 pandemic. Globally, governments faced pressure from members of retirement funds seeking access to their money. In this context, the concept of "emergency" access was first used. The idea of referencing an emergency was quickly dropped as it was too difficult to singularly define. This latitude allowed members to broaden their own definitions and interpretations as to what constitutes a savings pot withdrawal requirement.
Government clearly used the accessing of a portion of one’s retirement fund as a negotiating tool in exchange for preserving the balance. Overall Government will regard Two-pot as a successful exercise, ensuring that most of a member’s retirement fund is now preserved.
Allowing access to a portion of one’s retirement fund (the savings pot) represents an important shift away from a member’s resignation as being the only option to access their retirement funds before retirement.
The risk of prematurely tapping into these long-term assets remains. Each withdrawal diminishes the compound growth effect that retirement savings inherently possess, regardless of how “justified” that withdrawal may be in the moment. Other considerations include appropriate asset classes and liquidity.
At GTC, we have largely addressed the initial surge in demand for Two-pot savings withdrawals. In a recent GTC survey of impacted members, aimed at determining GTC's Net Promoter Score, we gathered valuable insights. A notable trend that emerged was that a large number of members articulated an intention to utilise this option again (some noting that it would be repeated) in the future.
It is critical for every retirement fund member to grasp fundamental investment principles and embrace the discipline required for long-term investing. Achieving financial stability involves hard work and commitment, and it’s GTC’s mission to help South Africans recognise the importance of informed financial decisions. A Two-pot withdrawal compromises retirement savings, no matter the quantum or the time to retirement. Or the reason.
GTC believes that it is not enough to just be a retirement fund administrator. It is our fiduciary responsibility to educate and support retirement fund members. It is only by doing this that we can ensure that they are equipped to make decisions that protect their long-term financial well-being, ultimately resulting in a healthier financial future for all South Africans.
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