Two-Pot withdrawals carry a lasting cost for retirement outcomes

A growing behavioural trend is emerging under the Two-Pot Retirement System, and it presents a serious risk to long-term financial security.

While the system was designed to provide limited relief in times of genuine financial distress, many individuals are accessing their savings pot for reasons that fall far outside its intended purpose.

“Rather than reserving these funds for genuine emergencies, we are seeing withdrawals being used for discretionary spending such as Black Friday purchases, holidays, upgrading cars and electronics. In some instances, this is even premeditated, with individuals planning at the start of the year to use their savings pot for such expenses. As a result, many choose to proceed without consulting their financial advisers because they are fully aware that the decision is not financially sound,” says Sean van Zyl, Certified Financial Planner® at Old Mutual Personal Finance.

This behaviour is closely linked to a broader issue. Van Zyl says that many people avoid confronting the true state of their finances and warns that accessing the savings pot creates a false sense of comfort and supports the illusion that everything is under control, when in fact, underlying financial health may be deteriorating.

Facing the truth about one’s financial position is essential. Only through honest and accurate assessment can individuals make informed decisions that would lead to meaningful improvement. Avoidance, by contrast, delays the problem and often makes it worse.

A common justification for early withdrawal is the belief that the shortfall can be made up later. This belief is deeply flawed, van Zyl warns. “In practice, it rarely happens. Instead, individuals give themselves false hope and effectively gamble with their retirement prospects.”

Equally concerning is the disregard for the tax implications associated with withdrawals. For many, the urgency to access cash outweighs any consideration of the cost. This approach is particularly dangerous when dealing with retirement savings, where the long-term consequences are significant and often irreversible.

“The tax consequences alone should give people pause, but too often we see individuals accessing these funds without fully understanding or even considering the cost,” adds van Zyl. Accessing the savings pot causes a spike in income and results in additional income tax to be paid, making the withdrawal less attractive. If someone sees they have R 30 000 in their savings pot and makes a withdrawal, SARS will recover tax up to 45% against the withdrawal.

The savings pot should be treated as a last resort, van Zyl says. It exists to address genuine needs when one is under considerable financial pressure, not discretionary wants.
“While broader awareness initiatives are needed, financial advisers play a critical role in helping individuals understand long-term consequences of short-term decisions,” says van Zyl.

To illustrate the real cost of early withdrawals, Old Mutual Personal Finance prepared a scenario over a five-year period, with outcomes measured at retirement.
• Scenario starts on 1 September 2024 with two investors, A and B, each with R250 000 in retirement savings
• Savings pots each seeded with 10%, resulting in R25 000 in savings and R225 000 in the retirement pot
• Each makes a monthly contribution of R2 000 split between pots, with about R667 to savings and R1 333 to retirement, with both pots growing at an annual return of 6.5 percent, compounded monthly
• A withdraws the full savings pot balance each year from 2025 to 2029 while B makes no withdrawals and remains fully invested
• From 2030 to retirement in 2040, both investors stay invested with no further withdrawals
• At retirement, A accumulates about R1 214 000 while B reaches about R1 386 000

“The difference of roughly R170 000 is driven purely by behaviour, despite identical contributions, returns and fees,” van Zyl explains.

The numbers make it clear. Even relatively small, repeated withdrawals early on can result in a significant loss at retirement. Once that compounding advantage is lost, it cannot be recovered.

“The real risk is not the withdrawal itself, but the interruption of compounding at the most critical stage. That is where the lasting damage is done,” concludes van Zyl.

Individuals are urged to approach withdrawals from their savings pot with caution, discipline, and a clear understanding of their purpose, and to consult a financial adviser before making any decision to withdraw, as the withdrawals can have lasting consequences for long-term financial security.