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Two-pot pension system 'not a silver bullet for emergencies'

Published Feb 23, 2022


Having submitted its reaction to National Treasury on the latter’s proposed two-pot pension savings proposal, the financial services industry now eagerly awaits clarity from Finance Minister Enoch Godongwana’s Budget this week.

The proposal, where individuals would be able to access contributions from one pot, with contributions to the other pot saved until retirement, is part of government’s broader retirement reforms aimed at encouraging employees to adequately save for retirement.

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“If the two-pot system is implemented properly, it will provide a feasible and accountable solution to address the immediate needs of many retirement fund members,” says Gontse Tsatsi, head of retail client management at Old Mutual Investment Group.

Despite the positive impact anticipated, Tsatsi says the changes could lead to reduced savings for retirement.

“Investors must continue to invest for a rainy day which could occur in the short or medium-term, independent of their retirement savings. They should not use their retirement savings as a form of emergency savings. Saving for emergencies is as critical to a financial plan as investing and planning for future financial goals,” says Tsatsi, adding that the key to reaching your long-term financial goals is to ensure that the occasional crisis does not derail your plans.

According to the annual 2021 Old Mutual Savings and Investment Monitor, 34% of South Africans do not have enough savings to last more than a month were they to lose their income or jobs, while 37% said building up an emergency savings pot was a key priority.

How to invest for emergencies

Unit trusts funds are a great vehicle for emergency funds where investors can choose whether to invest in an aggressive option, targeting high returns but also which has a higher risk, or invest in a low-risk option which would generate steady growth over time. Other benefits of investing through a unit trust include the fact that funds are available immediately to the investor and with no penalties.

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“What many people may not know is that investors can take an investment holiday without losing the money already invested in the unit trust,” says Tsatsi.

A popular form of saving amongst South Africa is stokvels, with 75% of Savings Monitor respondents reporting to being a member of a stokvel and 36% of members belonging to more than one stokvel.

The National Stokvel Association of SA says stokvels collect an estimated R50 billion per year. The growth in stokvel numbers over the past six years, shows that a “savings culture” may not be the issue in South Africa.

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“Stokvels should also consider using unit trusts to hold their cash, turning it into assets. It is important to seek the advice of a financial planner or expert before doing so to ensure that they invest in the right unit trust aligned to their needs,” says Tsatsi, further advising that investors should seek an investment professional who will also ensure that their investments are appropriately diversified to mitigate the risk of loss through market volatility.

A key feature of unit trusts, which highlights the main difference between investments and savings, is that unit trusts are an asset and can act as a second source of income to supplement investor income. This is through the periodical dividends paid to investors (should an investor elect not to re-invest them). This additional income stream can be the first port of call when emergencies hit, providing much-needed financial support.

A unit trust with exposure to growth assets like equities protects the value of investors’ money against inflation. Bank accounts are ideal for saving but are seldom able to deliver the real growth required to protect investors against the general increase of the cost of living over time.

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“For emergency use, unit trusts are a no-brainer as they not only tide you over in a time of need but ensure that your long-term financial plans are not jeopardised. Investors should, therefore, consider investing in unit trusts, an ideal vehicle for a wide range of investment needs, including emergencies,” Tsatsi says.


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