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The two-pot retirement system: what’s really cooking?

25 March 2024 Fedgroup
Sheldon Friedericksen, GM of Group Benefits at Fedgroup,

Sheldon Friedericksen, GM of Group Benefits at Fedgroup,

The much-anticipated two-pot retirement system is set to debut on 1 September and seeks to tackle the notorious lackadaisical approach to savings. A noble endeavour indeed, given that a mere six out of every 100 South Africans currently have hopes of retiring with any semblance of comfort, as per the sombre statistics laid out by the National Treasury.

Sheldon Friedericksen, GM of Group Benefits at Fedgroup, offers a different perspective by saying that the envisioned two-pot system might fall short of its lofty ambitions of promoting a savings culture. Instead of turbocharging savings habits, it could inadvertently grease the wheels for more frequent dips into retirement funds. It's a bit like trying to fill a leaky bucket with more water – commendable in intention but perhaps less effective in practice, but he acknowledges the imperative for change.


The current system, where retirement funds resemble a mythical treasure chest accessible only upon the retirement, termination, or resignation from a job, fosters a culture of desperation. People find themselves contemplating drastic measures, like tendering resignations, solely to tap into their hard-earned nest eggs; a scenario which is not conducive to sound financial planning.
In essence, the two-pot retirement system tries to provide a safety net for both emergency funding and retirement. Yet, it appears to stumble on the crucial task of instilling a robust savings culture - almost offering a lifeline while inadvertently loosening the anchor.


Financial literacy is a must
“We have to remember that many South Africans live either very close to the breadline or beyond their means”, Sheldon pointed out. This is why it is vital to set-up financial buckets linked to specific goals where people can save for emergencies, short-term aspirations and the distant horizon of retirement. But, this raises a pertinent point amidst the buzz of the new two-pot system: without a dedicated focus on a holistic financial journey spanning an entire lifetime, are we merely rearranging the deck chairs on the Titanic of financial planning? It’s like having a shining new car without having a roadmap – impressive, but without direction.


He added that people generally don’t know how much money they need for retirement, and this is where authorised financial service providers (FSPs) have a definitive role to play by providing financial literacy. At Fedgroup, it’s not just about profit margins, it’s about putting people first. In his words, “Our responsibility as a FSP is to assist people on their financial journeys by offering products that are as easy to understand as they are effective, all within tax efficient structures”. After all, in the grand tapestry of financial planning, simplicity is often the thread that weaves success.


Tax to the max
Sheldon cautioned that people must take note of the tax implications linked to withdrawals from the two-pot retirement system. He said that government already expects to raise about R5 billion in the 2025 tax year from retirement savings withdrawals. This is because lump sum withdrawals will be taxed according to standard tax brackets. “So, think twice before you withdraw money from your retirement savings since there’ll be tax implications and you’ll have a smaller pot for retirement, which has to last for many years”, he commented.


A shrinking pot of retirement savings
In the ongoing saga of nudging South Africans towards a savings culture, National Treasury has played its hand, aiming to steer clear of the dreaded welfare state label. Yet, the million-rand question still stands: what does your retirement plan look like when you've got less in the pot? All while people are defying the odds and living longer, and medical expenses are skyrocketing with no end in sight. Sheldon stated that this is where financial advisors have a crucial role to play by illuminating the consequences of financial decisions and advising clients on asset choices and allocations. But, one of the main aspects that asset managers, financial advisors and pension fund trustees might be grappling with very soon is: how much liquidity must be held in these portfolios to accommodate early withdrawals? And, as we all know, liquid assets tend to generate lower returns compared to other asset classes.


Back to basics
One has to remember that National Treasury has a more general, holistic approach to the proposed two-pot retirement system, which is one of the reasons why Sheldon doesn’t believe this system will achieve the objective of instilling a stronger savings culture. He sees more value in offering clients uncomplicated, bespoke products because, for many years, the financial services landscape has allowed unnecessary complexities to creep into financial product designs. We have to remember that people interact differently with money and have unique needs when it comes to savings; something that has to be top-of-mind when savings products are designed.

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