From 1 March 2024, the Treasury has proposed a plan to protect retirement savings and provide relief in difficult times. The new fund structure is promising, but South Africans must continue to manage their savings carefully.
In last month’s Budget Speech, South Africa’s Finance Minister Enoch Godongwana confirmed the National Treasury’s intention to increase the yield of pension savings through the “two-pot” pension savings structure, which is proposed to take effect on March 1, 2024.
South Africa may shine in many areas, from rugby, music and dancing to being super-friendly and able to laugh at ourselves and our problems, but saving for retirement is unfortunately not one of our strengths. Not by a long shot.
An annual survey conducted by Old Mutual shows that 94% of working South Africans have not planned and saved enough for a comfortable retirement. The situation is made worse by the fact that many members of pension funds or pension funds are resigning from their jobs when they are under extreme financial pressure in order to access the cash in their retirement savings.
Lizl Budhram, Head of Advice at Old Mutual, said: “The long-term consequences of accessing some or all of your retirement savings in this way, unfortunately, can be bad. It is rarely possible to make up for the loss of years of compound interest.
“However, the financial upheaval caused by the Covid-19 pandemic and lockdown has been so severe that many people feel they have no alternative.”
The new system offers relief in difficult times
The new pension fund system “two pots” offers an alternative to withdrawing funds and cash in everything. All members of pension funds and funds, as well as holders of pension annuity policies, will be allowed to access up to one-third of their pension savings before retirement age without having to resign or change jobs.
But it will be mandatory to preserve much of the pension savings (two thirds in the main “pot”), leaving it to grow untouched and intact.
It is important to understand that this new system will be implemented only for future savings (from March 1, 2024, when the “two pots” will be launched). This means that no savings will be part of the “two pots” arrangement.
In short, the “two pot” system is designed to simultaneously serve two key purposes. Larger “pots” protect your future retirement well-being, while smaller ones are more flexible and provide cash relief in times of severe financial hardship.
How to prepare for a comfortable retirement through the “two pot” system:
- Fill those pots! Increase your retirement savings every month, if possible, especially if you’ve withdrawn and spent funds from your retirement savings. The more you save, and the faster and the more you save, the more you will benefit from the phenomenal power of compound interest.
- Create a short-term emergency fund separate from the long-term pot. Aim to save the equivalent of at least three months’ salary in a savings account that you can access as a buffer or safety net for tough times. Although the new regulations will allow you to put your pension savings (via a “pot”) relief, this does not mean that you should.
It remains a better idea to leave all your retirement savings and two pots untouched until you retire, says Budhram. If you need extra cash, don’t look to the “savings pot” as your first port of call. Rather see it as an absolute last resort.
He explained: “It will remain very difficult to resuscitate a pension plan that has experienced large cash withdrawals. If you leave your pension savings (including pot two) untouched for long-term growth, the power of compound interest can increase your savings significantly.
- Track your expenses. Sign up to apps like 24seven that help you identify, understand and change risky spending habits.
- Join an accredited financial advisor who is that supported by responsible and reputable financial service providers.
- Together you can understand your financial needs and goals, and make financial plans and budgets. Having a good financial advisor has many advantages and benefits. Not only can they answer all your questions about the new pension fund system, but they can also advise you on short- and long-term savings and investment options, and help you manage your finances in the most tax-efficient way.
- Ask your advisor about it Old Mutual Max Invest optimal retirement plan. It is designed to adapt to life changes by adjusting the premium amount if necessary and increasing the fund value after five years.
- Try adding it premium protection for the plan, to ensure the premium will still pay if you become disabled, keep your retirement plans on track.
Find out more:
- talk to your financial advisor
- call 0860 60 60 60 if you don’t have an Old Mutual financial adviser
- visit oldmutual.co.za/retirement
Old Mutual Life Assurance Company (SA) Limited is a licensed FSP and Life Insurer.