The 2-pot retirement system was implemented on 1 September 2024. Many analysts assumed that a significant number of people would make withdrawals from the savings component of their pension investments to spend, which would boost the retail economy.

But what has ended up happening? How many people have withdrawn part of their savings, what have they spent it on, and what are the implications for their retirement funds?

Withdrawals from 2-pot savings

The South African Revenue Service (SARS) has confirmed that by the end of October 2024, just over 1.2 million applications for tax directives for withdrawals from retirement fund savings pots had been received, with around 1.1 million of these approved. Almost R22 billion had been withdrawn from retirement savings at the time.

If you want to withdraw from your savings, you can download an application for directives from the Find a form page on the SARS website. You will need to provide your tax number, ID number and proof that you don’t have any outstanding debt with SARS. If your application is successful, SARS will issue a tax directive that tells your pension fund management how much tax to deduct from your withdrawal. Your withdrawal will be taxed at the applicable marginal tax rate for your income.

Reasons behind 2-pot withdrawals

In recent surveys of pension fund managers, many speculated that most people withdrawing money from their savings early would use it to fund a large expense, like a deposit on a house or a new car. Some financial analysts were also convinced that consumers would go on a spending spree. But the reality is somewhat different. Data from a JustMoney.co.za consumer survey of more than 6,000 respondents considering withdrawals from their retirement savings revealed that 79% of respondents said they would use the funds to repay debt. This trend – and the sheer volume of withdrawals – show the serious financial pressure that South Africans are under.

This is borne out by most pension fund managers. News sources pointed out that Momentum, for example, handled more than 150,000 withdrawal claims with a value of R2.5 billion. Old Mutual received 125,000 withdrawal requests (totalling R1.7 billion) during the first 10 days of opening its application system. Alexander Forbes saw more than R1.5 billion in withdrawals within the first 2 weeks of the new system.

These withdrawal rates are significant, and need to be understood in the context of the following restrictions on withdrawals:

• If there was less than R2,000 in your savings pot when the 2-pot system was introduced, you were not allowed to withdraw any money.
  
  
• If you were a member of a provident fund on 1 March 2021 and older than 55 when the system was introduced, you must first opt in to the system for access to your savings pot. The window for opting in closes on 1 September 2025, so there may be further withdrawals as older pension fund members opt into the system.

A survey by Discovery also found that many people were using the extra money for education, mostly to pay children’s school fees. The fact that withdrawals are being used to pay off debt, or car or home financing, or for education, is a reliable indication of intense financial pressure.

Risks of early retirement withdrawals

Despite the tough economic environment, it’s important to be clear about the consequences of early withdrawals. Your retirement fund is a long-term investment that attracts compound interest – this is the growth upon growth that your investment achieves over time. You can invest in your retirement funds continually, and the longer you leave the funds to gain interest, the more chance you have of growing wealth.

If you withdraw R30,000 from your savings, for example, after 10 years your retirement fund will be about R77,000 smaller than it would have been if you’d left that R30,000 in the fund. This shortfall only gets bigger as more time passes.

You should also consider the tax implications carefully. You will lose a significant amount of any withdrawal from your savings pot to tax, because you are taxed on these withdrawals at your marginal rate. So, if you withdraw R30,000 and your marginal rate is 45%, you will receive only R16,000 once tax and fees have been deducted. Your tax rate when you get to retirement age could be lower.  

If you can afford to leave your retirement fund savings untouched to attract long-term compound interest, your long-term retirement investments will achieve optimal growth. Nedbank can help you work out how much you need to save for a comfortable retirement at various life stages. Browse our savings and investment offerings to find alternatives to withdrawing from your retirement savings. Or speak to a financial adviser to find out more about the 2-pot system and the best plan for your retirement savings and investments.