The 2-pot retirement system came into effect in South Africa on 1 September 2024. By the end of October, when Finance Minister Enoch Godongwana delivered his Medium-term Budget Speech (MTBS – his first under the Government of National Unity), the South African Revenue Service (SARS) confirmed that just over 1.2 million applications for tax directives had been received for withdrawals from retirement-fund savings pots, with around 1.1 million of these approved. Almost R22 billion had been withdrawn from retirement savings at the time.

If you were one of the many South Africans who withdrew from your savings pot, what were your reasons, what was the South African Reserve Bank (SARB) response to those withdrawals, and what are the implications of the mini-budget for future withdrawals under the 2-pot system?

Statistics on 2-pot withdrawals

Many financial professionals speculated that most people withdrawing money from retirement savings early would use it to fund a large expense, like a deposit on a house or a new car. More than a few analysts voiced the opinion that South African consumers would go on a spending spree. But the reality is somewhat different.

A JustMoney consumer survey of more than 6,000 respondents revealed that 79% of them intended to use the funds to pay off debt, a finding that is somewhat at odds with SARB’s statement regarding the R51 billion expected to be withdrawn from retirement savings in 2024, that a larger portion was going to consumption than to debt repayments. Whether or not the JustMoney statistics reflect those of the broader population, the sheer volume of withdrawals shows the serious financial pressure that South Africans are under.

The findings were backed up by pension fund managers at the coalface of the financial decisions about people’s pension savings. 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 experienced more than R1.5 billion in withdrawals within the first 2 weeks of the new system.

But have people been proven correct in using their pension savings to pay down debt? Did the MTBS in October 2024 provide a silver lining?

The MTBS and the national economy

The MTBS focused on 3 key economic indicators that need to move in a positive direction to give consumers more debt relief:

• GDP growth
  Minister Godongwana expects Gross Domestic Product (GDP) growth to rise to 1.4% for the 2025 financial year, 1.7% for 2026, and 1.9% for 2027. But for this financial year to the end of February 2025, he reduced the expected GDP growth to 1.1% – down from an estimated but very modest 1.3% growth projected in the February 2024 budget. GDP growth should be at around the same level as population growth to maintain economic stability, and SA’s population grows at 1.5% per year. From an economic perspective, this means we are still going backwards in terms of wealth generated per person.

• Tax income
  National tax receipts for the period of the MTBS were much lower than expected, at almost R23 billion less than February 2024 estimates in the annual budget. Corporate tax collections had gone up, but all other forms of taxation, including personal income tax and VAT, were short of expectations. The MTBS also estimated that lower income levels, and therefore lower tax revenues, are expected to continue for the next 2 years.
  
  
• Government debt
  Minister Godongwana’s MTBS made it clear that levels of government debt are too high. Debt will approach R6 trillion in the 2025/2026 financial year – servicing the costs of this debt will cost R1 billion a day. The MTBS estimated that SA will improve this debt picture much more slowly than anticipated. The high levels of public debt are directly linked to the seeming inability of the national economy to grow, despite other positives such as lower inflation. Some of the debt issues are caused by the inability of provincial and national departments to ensure that municipalities pay what they owe, particularly to utility providers.

An area that is looking positive is the wide-ranging efforts that government is making to partner with the private sector to create jobs on a large scale.

Household debt relief

This macroeconomic picture is somewhat gloomy, but it does provide context for why you might choose to withdraw savings from your pension fund to pay down household debt. That approach is entirely justified – and the national economic outlook suggests that you should continue to sit tight for at least the next year or so, taking on as little extra debt as possible. In fact, it would be wise to open more savings or investment accounts for any extra income over the next couple of years.  

Although the 2-pot system can be a lifeline in an emergency, early withdrawals from retirement investments can seriously reduce the amount you’ll have saved by the time you retire. Explore other strategies to reduce debt before you dip into your retirement savings pot. Nedbank can help you work out how much you need to save for a comfortable retirement. Speak to a financial adviser about the best plan for your retirement savings and investments.