By: Leigh Nooy
The recently enacted two-pot retirement system, signed into law by President Cyril Ramaphosa, introduces a novel approach to retirement savings. Under this system, members' future contributions are divided into two components: a savings component and a retirement component. One-third of the contribution is allocated to the savings component, while two-thirds are preserved until retirement.
Member’s existing retirement fund forms a third component of which 10%, limited to R30,000, is transferred to the Savings Component on 1 September. This Savings Component is accessible on this same date and Summit believes it will benefit most consumers to access it accordingly.
The benefits of withdrawing member’s savings component on September 1, outweigh the consequences for most consumers.
Why Consider Seed Capital Withdrawal?
1. Cost of Credit vs Retirement Returns
Most South Africans have some form of unsecured credit. Many forms of unsecured credit, such as personal loans, payday loans, and even credit cards, attract expensive interest and fees. After adding up interest, initiation fees, monthly service fees, and credit life premiums these forms of debts attract yields between 15% and 300% per annum. However, there are few, if any, retirement funds earning returns that exceed 15% per annum on a three to five-year basis net of fees. Consumers therefore use the seed capital to settle or reduce expensive debts whilst the differential between cost of credit and investment returns are so vast.
2. Paying Off Arrears
Many South Africans are in arrears on one or more credit accounts. 26 million credit accounts are currently in arrears, nearly 28% of all credit accounts. These arrears attract additional fees, penalties, and interest and should therefore rather be settled with the member’s seed capital. Arrears on asset-backed debt, such as mortgage and vehicle finance, should be prioritised to prevent further legal collections including repossession.
3. Emergency Flexibility
The new system allows fund members to access their retirement savings during emergencies without requiring resignation. By withdrawing seed capital, consumers can address immediate financial needs while maintaining long-term security. Consumers should build up emergency savings accounts amounting to at least two month’s salary. These emergency funds can be used instead of the current culture of accessing personal loans to pay for emergencies.
The real benefit is not having such a paternalistic regulation informing consumers they cannot make withdrawals from their retirement funds unless they resign or retire from their employment.
* Nooy is the CEO of Summit.
PERSONAL FINANCE