What South Africans Are Spending Their Two-Pot Money On

With the launch of the two-pot retirement system on September 1, 2024, many South Africans are finding themselves in a tricky financial situation.

This new system allows individuals to access one-third of their retirement savings, and it’s clear that many are using these funds to address immediate financial pressures. 

The Reasons Behind Withdrawals

According to Discovery Corporate and Employee Benefits, the main reasons people are dipping into their retirement funds include:

• Home and Car Expenses (24%): Many are using their savings to settle mortgage or vehicle payments, reflecting the ongoing financial strain on household budgets.
• Short-Term Debt (21%): Paying off debts is a common motivation, showcasing how urgent cash needs can overshadow long-term planning.
• Education Costs (20%): School fees are a significant burden for many families, prompting withdrawals that could otherwise bolster retirement savings.
• Everyday Expenses (11%): The rising cost of living means people are turning to their retirement funds for day-to-day spending.
• Home Improvements (from the ‘Other’ category): Many are using the funds for renovations, though this isn’t seen as an ideal use of retirement savings.

Guy Chennells, Chief Commercial Officer at Discovery, notes that while home improvements are understandable, they don’t really qualify as emergency spending.

Who’s Making Withdrawals?

The data reveals that individuals aged 35 to 45 are leading the charge when it comes to withdrawals, with 27% of eligible claimants in this age group opting to access their funds.

Interestingly, withdrawal rates were similar for younger and middle-aged individuals (around 25%), but significantly lower for those over 55 (13%).

Income also plays a huge role in withdrawal patterns. For instance:

• 38% of low-income earners (earning R125,000 or less) made withdrawals.
• 29% of middle-income earners (R125,000 to R500,000) accessed their funds.
• Only 12% of high-income earners (R500,000 to R1 million) withdrew money, and just 4% of those earning above R1 million did the same.

A Word of Caution

While accessing these funds may seem like a quick fix, experts are urging caution. Withdrawing from your retirement savings can have serious long-term consequences. Chennells emphasizes that understanding the implications of early withdrawals is crucial.

For example, withdrawing now could mean a smaller nest egg when you actually retire, especially once taxes are deducted from your withdrawals.

Eligibility Insights

It’s essential to know who qualifies for these withdrawals. Discovery’s data reveals:

• 45% of those under 35 are eligible.
• 71% of individuals aged 35 to 55 can access their funds.
• 61% of those over 55 are eligible, with an additional 20% likely to qualify if they opt into the system by September 2025.

When looking at income, only 34% of low-income earners were eligible, compared to 67% of middle-income earners and a staggering 90% of those in the very high-income bracket.

Plan Wisely

While the two-pot system may offer immediate financial relief, dipping into your retirement savings can have lasting repercussions. Start thinking about your financial future now—consider alternative ways to manage short-term expenses, and prioritize your long-term goals.

Remember, every rand saved today can significantly impact your retirement down the line.

Don’t gamble with your future—plan for it!