Minimizing early withdrawals is key to safeguarding your future financial well-being, says product development actuary at Coronation, Rael Bloom.
The introduction of the two-pot system has led to an initial surge in withdrawals by retirement fund members. However, this trend is expected to ease as the system is designed to enhance long-term retirement outcomes,
said Bloom
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The South African Revenue Service (SARS) said this week that a total gross lump sum of some R21.4 billion has been paid out to taxpayers, who have applied to utilise their Savings Withdrawals Benefit of the two-pot retirement system.
More than 1.2 million South Africans applied for the tax directive, with at least 1.14 million approved.
According to the revenue service, the remainder were “declined for a variety of reasons, including incorrect identity numbers and incorrect tax numbers, amongst others”.
Just over a month ago, South Africa’s retirement fund system experienced a major shift with the launch of the two-pot system. After years of reforms, compulsory preservation is finally a reality—an essential step towards improving the retirement prospects for millions of South Africans.
The system also allows members to access a portion of their savings in case of emergencies. In the first few days after its introduction, SARS received almost 160,000 tax directive applications for withdrawals, totalling R4.1 billion.
One of the largest administrators processed more claims in the first week than in the previous six months combined.
While these withdrawals are expected to vary in motivation—whether genuine emergencies or for discretionary spending—it’s crucial to emphasize the long-term benefits of preserving savings, said Coronation.
The initial surge in claims is anticipated to level off as the two-pot system stabilizes. The system’s real value lies in providing flexibility for emergencies while ensuring the bulk of savings is preserved for retirement, the financial services company said.
While the two-pot system offers flexibility, early withdrawals can have lasting financial consequences, significantly affecting a member’s standard of living in retirement, said Bloom.
One immediate consequence is that withdrawals are taxed at the member’s marginal tax rate, which results in losing part of the withdrawal to taxation. Members who wait until retirement can benefit from preferential tax tables. Early withdrawals, however, mean missing out on this tax advantage.
More importantly, early withdrawals disrupt the power of compounding, Bloom stressed. Compounding allows savings to grow exponentially, as returns generate further returns.
For example, withdrawing R1 from a retirement fund 30 years before retirement could result in a reduction of R6 in future savings value. Even withdrawing 10 years before retirement can result in a loss of R2 in future value for every R1 withdrawn.
To illustrate this, assume you are 35 years old and intend to retire at age 65. Any R1 accessed through an early withdrawal may cost you R30 in lost retirement benefits at the time of retirement.
In other words, by resisting the urge to access your savings early, your money could have multiplied by a factor of 30 over the three decades until retirement. While the numbers become less dramatic when you shorten the period between early access and retirement, they remain retirement-defining.
Even for an individual making an early withdrawal 10 years before their intended retirement date, it would still cost them R3 in lost retirement benefits for every R1 taken out early
Early withdrawals, therefore, can jeopardize long-term financial security.
One of the key advantages of the two-pot system is that it allows flexibility without forcing immediate withdrawals. This means that members can keep their savings invested, benefitting from growth over time. As long as the funds remain untouched until truly necessary, members can maximize their returns.
The ultimate goal of retirement funds remains the same: ensuring a dignified retirement for members. Flexibility for those in financial distress is important, but staying invested in a well-managed fund offers the most reliable path to long-term financial stability.
The message is clear: stay invested where possible for a more secure financial future, said Bloom.