New data indicates that South Africans are showing less interest in withdrawing from their retirement savings through the new two-pot retirement system.
With less than two weeks before the system becomes available, it appears the initial enthusiasm has waned.
Research by Old Mutual suggests fewer people plan to access their retirement savings early. The number of working South Africans with retirement savings (income R8,000 - R119,000) who are likely to withdraw has dropped by 10%, from 62% in 2023 to 52% in 2024.
Vuyokazi Mabude, head of knowledge and insights at Old Mutual, said: “Our research shows that people have a better understanding of the importance of saving for retirement, and they are feeling more confident about their finances and making smarter decisions.
“Furthermore, broader access to financial advice has significantly boosted financial confidence, which was a key finding in this year’s Monitor, leading to more informed and better money decisions.”
The research also indicates that confidence in the adequacy of retirement savings influences views on the two-pot system.
“Higher confidence appears to also typically correlate with a positive perception of two-pot while working South Africans who have lower confidence in the adequacy of their retirement savings displays greater scepticism,” she added.
“Lower confidence is more common among lower-income groups and individuals younger than 50, who are also more likely to withdraw their retirement savings,” Mabude said.
The study found that only 26% of working South Africans are ‘very confident’ they have enough savings for retirement, compared to 38% of higher-income earners (R60,000 - R119,999).
Retirement system explained:
Meet Jameel
Jameel is 30 years old and has R50 000 in his retirement savings.
At the end of August, 10% of his retirement savings (R5 000) will be transferred to his Savings Component as an opening balance.
This will leave him with R45 000 in his Vested Component.
When Two-Pot is implemented, Jameel can do the following with the R5 000 in his Savings Component:
Withdraw it (subject to tax).
Let it continue to grow. He can access it once per year of assessment for future emergencies.
Avoid withdrawing it until retirement. At retirement he can choose to receive it as a lump sum (subject to tax).
When Jameel reaches retirement, he can:
Take all or some of his Savings Component as a cash lump sum (subject to tax) and use his Retirement Component to buy a pension.
If the amount of his Vested Component that must be annuitised plus his Retirement Component is less than R165 000, he may withdraw the full amount.
Lessons to learn
Research conducted by Investec draws on early pension withdrawal regulatory amendments implemented in Australia, Chile and Peru, offering instructive insights and potential lessons related to the macroeconomic implications of pension fund withdrawals on capital markets.
Ayan Ghosh, head: Cross-Asset Investment Strategy at Investec said that Australia allowed retirement fund withdrawals in a means-tested manner that were subject to taxes, unlike Chile and Peru.
The inadequate design of pension fund withdrawals in Chile and Peru led to notable asset withdrawals and hurt the liquidity and depth of domestic capital markets.
In Australia, 1% of private retirement savings assets, or 2% of gross domestic product (GDP) was withdrawn in 2020.
Nearly half of those eligible withdrew in the first 10 days and three-quarters who had funds remaining after the first round withdrew again.
Australian households used part (50%) of pension fund withdrawals to repay loans. The spending response post the loan repayment was very sharp, with 90% spend occurring within the first four weeks.
The majority (60%) of discernible spending was on non-durable products, as blue-collar workers and those with slightly lower wages withdrew more.
Early pension withdrawals in Australia generated roughly 0.8% of GDP in direct spending within four months.
Ghosh said that after Chile approved early pension withdrawal in 2020, consumers drew on 23% of the total assets held in 2020, which equates to roughly 20% of the country's GDP that year.
Chilean households used part of the pension withdrawals to repay loans. Credit card past due loans decreased below pre-pandemic levels, while non-performing loan rates (NPLs) for banks in Chile reached historic lows. Consumers also replenished cash deposits, which increased significantly between Q1 2020 and Q3 2021.
However, Chilean pension funds were negatively impacted after they were forced to liquidate assets to meet the withdrawal demands, which reduced their domestic exposure to long-term domestic government and corporate bonds, and bank stocks.
While this increased financing cost for government and corporates, IMF data showed no clear evidence of negative performance among Chilean banking stocks relative to the local aggregate stock market index, largely due to the increased deposits.
Similar to Chile, Peru also saw significant early withdrawals from pension funds as a percentage of total pension funds assets under management given the inadequate design of pension withdrawals.
Investec believes that trends in South Africa will more closely mirror those seen in Australia. Pension entitlements among South African households expressed as a share of nominal GDP is one of the largest across emerging markets, averaging 120% between 2018 and 2022.
Research suggests South African consumers will use capital from the two-pot system to reduce debt and fund living expenses.
For instance, the Sanlam Benchmark survey found that South African retirement fund members who withdrew benefits recently used the amount to reduce short-term debt (51%) and fund living expenses (33%).
"Worryingly, the survey highlighted that only half of the members surveyed indicated they were aware of the tax implications, which suggests initial withdrawals may surprise on the upside.
"While impacting retirement savings, Investec research indicates potential economic benefits. If consumers access R100 billion or more in early pension withdrawals, the resultant spending and savings could boost real GDP in the country by more than 0.5% in 2025 and add R20 billion in extra tax revenue."
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