By Ross Marriner
South Africa’s retirement system is set to undergo significant changes with the introduction of the two-pot reform, effective from September 2024. Historically, South Africans could not access their retirement savings until reaching retirement age. The upcoming reform allows individuals who have invested in retirement annuities access to withdraw a small portion of their retirement savings on an annual basis, if required.
From September 2024, retirement annuity investments will be structured to include a retirement lump sum pot and a retirement income pot. (There will also be a third pot known as the vested pot, which will be made up of the value of the retirement annuity up to September 2024.) You will have the option to make one annual withdrawal from the balance in your income pot, but not be able to access your lump sum pot until retirement.
Although this change will provide investors with a safety-net during times of genuine hardship, such as the COVID-19 lockdown era, it is advisable to avoid early access to retirement funds wherever possible. This is because retirement funds are just that – funds that are intended to be used once you retire and are no longer earning a salary. Viewing these funds as a reserve for cash flow shortages can jeopardise your financial security in retirement. You should rather aim to live within your means and only spend money on what you can afford.
Research undertaken by Coronation found that for every R 1 accessed by a 35-year-old investor will cost R30 in lost retirement benefits at the age of retirement. Accessing retirement funds before retirement can be described as “borrowing from your future self.”
A prudent investment strategy involves diversifying your savings across different strategies. Firstly, allocate some of your savings to a short-term “emergency” fund such as a bank savings or money market account which would be immediately accessible if required. Secondly, allocate some of your savings to medium to long-term investments which, although accessible, are intended to meet medium to long-term financial goals. Finally, allocate funds to retirement funds which should ideally be left untouched until retirement. This will allow the investments time to benefit from the powerful effect of compound growth.
To avoid a significantly reduced standard of living in retirement, it is strongly recommended that you make regular contributions to retirement funds for as long as you possibly can. Not only will you receive the associated tax benefit, but you will also be investing towards a comfortable retirement.
While the two-pot reform introduces flexibility in accessing retirement savings, it is vital to use this option judiciously. Maintaining a disciplined approach to saving and investing will ensure financial stability and a comfortable retirement. An experienced Certified Financial Planner® will be able to assist you to make sound financial decisions in accordance with a well thought-through financial plan.
Rands and Sense is a monthly column, written by
Ross Marriner, a CERTIFIED FINANCIAL PLANNER® with PSG Wealth.
His Financial Planning Office number is 046 622 2891
