While there are many fears around the imminent introduction of the two-pot system for retirement funds, members of these funds will be significantly better off due to the changes.

Firstly, you will have access to your retirement funds without having to resign. Many desperate South Africans who face a financial crisis believe that their only solution is to risk unemployment by resigning for their pension benefits.

By allowing access to a portion of these retirement savings once a year, you will have access to financial relief should you require it.

Secondly, the new system is expected to increase the amount of funds available to you at retirement. This may seem counter-intuitive, considering that you can access a portion of your funds prior to retirement, however, according to research by Old Mutual, workers who start saving into a retirement fund at age 25 will amass retirement savings two to three  times greater than under the old system.

“The ingenuity of the two-pot system lies in its ability to acknowledge the need for immediate financial access, reflecting our socio-economic reality, while still safeguarding long-term retirement goals,” says Keri-lee Edmond, the Analytics and Insights Manager from Old Mutual Corporate Consultants, who was leading the quantitative investigation.

Momentous shift in conventional thinking

“This marks a momentous shift in conventional thinking, and one which we believe will have a significantly positive effect on retirement outcomes in the future.”

Her research indicates that the two-pot system could enable young South Africans entering the workforce to save up to 9.5 times their annual salary by retirement, even if they use the entire savings component for emergencies.

If no emergency withdrawals are made, savings could reach around 14.5 times the annual salary, ensuring greater financial security in retirement.

Currently, typical members of provident or pension funds save only 2.7 times their annual salary, which undermines post-employment financial stability. Experts recommend saving 10-15 times your annual salary in order to replace 70%-75% of your working income in retirement, highlighting a significant shortfall in current savings practices.

The problem the two-pot system addresses

The Old Mutual On Track research 2023, which analysed half a million employees in umbrella funds, revealed that members of employer retirement funds have been withdrawing 100% of their retirement assets in cash when changing jobs.

“This action represents the most significant destruction of value and has a negative multiplier effect,” says Edmond.

“The two-pot system aims to address this by preserving assets while allowing access to savings in difficult times. Compulsory preservation ensures more assets remain invested for longer, benefiting from compound interest and resulting in higher retirement savings.”

“The legislation requires two-thirds of retirement savings to purchase an annuity, providing regular income in retirement and financial security for leisurely activities,” says Edmond.

“Additionally, employees can withdraw from their savings component annually without leaving employment, addressing the current economic reality for many South Africans.

“The simulations also show that for older members with at least 11 years of service until retirement, the new system is expected to provide outcomes at least equal to, if not better than, the current system,” adds Edmond.

Remember, rights remain

It is important to note that while two-thirds of new contributions after 1 September will be preserved for retirement, all funds accumulated up to 31 August remain accessible should a member resign or be retrenched.

This article first appeared in City Press.