By: Brett Ladouce
It has now finally been confirmed that the two-component retirement savings system, widely known as the two-pot system, will come into effect on September 1 this year
To recap, the retirement fund contributions of all employees joining a retirement fund in which their employer participates after September 1 will be split into two components, or pots. One third of the fund contribution will go into a Savings Pot and two-thirds will go into a Retirement Pot.
You will be able to withdraw all the money (contributions and investment income) in your Savings Pot on an annual basis and your withdrawals will be added to your taxable income and taxed as part of your taxable income for that tax year. Alternatively, you will have the option of taking the balance of your accumulated savings in the Savings Pot as a lump sum retirement benefit (with the possibility of receiving the first R550 000 as a tax-free benefit) or using that amount to buy an annuity income stream at retirement. You will, however, not have access to the money in your Retirement Pot until your retirement, at which time that money must be used to buy an annuity income and cannot be taken as a lump sum.
It sounds great to have access to a portion of your retirement savings on an annual basis to make provision for unforeseen expenses or for foreseen luxuries, such as giving yourself a “Christmas bonus” at the end of each year or for having a “Janu-worry expense account” that can carry you through a long and (financially) dry January each year. It is easy not to consider what the true cost of these annual withdrawals from your Savings Pot will be over the lifespan of your career.
The example below will illustrate how these annual withdrawals can have an enormous negative effect on the amount that we have at retirement.
John and Jane
John and Jane are twins who are employed at the same company on January 1, 2025. They both earn R500 000 a year and are taxed at an income tax rate of 20%. They both decide to contribute R10 000 a month (R120 000 a year) to their retirement fund for a period of 30 years until they reach their normal retirement date. They both attain an investment return of 10% annually for 30 years. For the sake of simplicity, we will assume that the inflation rate is 0% for the next 30 years and that their annual income and fund contribution level remain the same for the 30-year period.
Jane decides to never withdraw any money from her Savings Pot and to let her contributions to the Savings Pot accumulate and grow until her retirement date. This is to give herself the opportunity to have the option of taking a substantial lump-sum retirement benefit in addition to the money in the Retirement Pot that she must use to obtain an annuity income stream.
John, on the other hand, decides to use his Savings Pot as his “Janu-worry expense account” to cover his expenses in January each year after overspending during his annual December holiday. John believes that the problems of January must be sorted out in January and retirement must take care of itself. Each year, he therefore withdraws the contributions he made to the Savings Pot as well as the investment income he earned during that year. This means that he is effectively only contributing R80 000 towards retirement each year and not R120 000 each year, like Jane
The different approaches John and Jane follow in regard to their Savings Pot lead to significantly different retirement outcomes. After two years and after John has made one withdrawal of R44 000 from his Savings Pot, Jane has total retirement savings of R277 200 of which R92 400 is in her Savings Pot while John has total retirement savings of only R228 800 of which R44 000 is in the savings account. At the end of five years, Jane has saved more than R805 000 for retirement while John has only saved about R580 000. After 10 years this picture has changed to about R2 100 000 in retirement savings for Jane and about R1 440 000 for John. At retirement, Jane has accumulated a total amount of R21 713 211 (with R7 237 737 in her Savings Pot) for retirement while John has only accumulated R14 519 474 (with only R44 000 in his Savings Pot).
By only withdrawing R44 000 per year for 29 years from his Savings Pot, John has lost R7 193 737 in retirement savings over the span of his 30-year career. If John did not withdraw the R40 000 (and growth thereon) that he contributed in 2025 in January 2026 and left that amount in the Savings Pot until the end of 2054 (30 years), the R40 000 would have grown to R697 976 due to the effect of compound investment growth.
From the above, it is clear that we must carefully consider making annual withdrawals from our Savings Pots. Just because you are allowed to do something does not mean that it is a good idea to do so, especially if you compare the immediate benefit of the withdrawal from your Savings Pot against the future loss of compound investment income.
The question that you should ask yourself before you make a withdrawal from your Savings Pot is: “Am I a John or a Jane?”
* Ladouce is a pension funds lawyer and the author of the book, Pensions for Palookas.