The 'two-pot' pension savings system in South Africa provides employees with limited access to their savings, but regular withdrawals can significantly reduce the amount available upon retirement.
According to an analysis by Paymenow, repeated use of this system could lead an employee to lose over one million rand by the time of retirement. One analysis estimates that repeated withdrawals could leave an employee with an amount approximately one million rand less.
The 'two-pot' system was introduced in September 2024 and allows fund members to withdraw funds from the savings component once per tax year, while keeping the main part of the pension savings protected until retirement. The goal of the system was to give employees access to money in case of financial emergencies without needing to resign or fully withdraw pension funds.
Consequences of frequent withdrawals
René Richter, a compensation and benefits consultant at Paymenow, noted that the trend of employees viewing annual withdrawals as part of their regular income, ignoring the impact on their pension savings, is concerning. Richter emphasized that the system fulfills its purpose by helping prevent resignations to access pension funds and protecting against expensive loans in real need.
He warned: "The risk is that the withdrawal becomes an expectation in the annual family budget, and that the effects of compound interest are not taken into account. Financial education must go beyond explaining how to withdraw money and start showing employees what they are losing."
The main reason for the difference in amounts lies in the loss of capital growth that could have been earned on the withdrawn funds. In Richter's example, an employee contributes R4,500 monthly to their pension fund, totaling R54,000 annually. Of this amount, R18,000 goes into the savings component, and R36,000 goes into the pension component.
The consultant specifically highlighted that without withdrawals, these contributions could grow to approximately R3.03 million in today's money by retirement. However, with an annual withdrawal of the full amount of R18,000, the sum would only increase to approximately R2.02 million.
Broader use of savings: IOL previously reported that the 'two-pot' system in South Africa is increasingly being used by middle-class households to combat the rising cost of living and debt, with many participants making repeated withdrawals. According to new data from Momentum Corporate, 52% of participants eligible to withdraw from the savings component have already utilized this option. The survey showed that affluent middle-income households are most inclined towards repeated withdrawals, while many low-income members cannot access the money because their savings fall below the minimum threshold of R2,000.