A few extra rands to spend over the festive season should not come from your savings pot under the two-pot retirement system.
As the festive season ramps up, cash-strapped consumers find it increasingly difficult to say no and walk away when they are lured by Christmas jingles and shelves full of things to buy. That is when they remember the stash in the savings pot available under the two-pot retirement system.
However, withdrawing some of your retirement savings under the two-pot retirement system should be the last thing on your mind and you should resist the lure of the two-pot cookie jar this festive season, Richard Carter, head of assurance at Allan Gray, says.
With the festive season fast approaching, consumers may be considering using their two-pot retirement system savings component to splurge, but Carter cautions against dipping into your retirement investments for holiday spending, as this could undermine your long-term retirement goals.
The recent introduction of the two-pot retirement system in South Africa may provide consumers with high levels of temptation to withdraw retirement savings to pay for discretionary festive season spending, he says.
“We continue to worry about investors taking out money for short-term needs that are not emergencies, undermining their long-term retirement savings goals.”
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Two-pot retirement system for emergencies only
South Africa’s two-pot retirement system, introduced on 1 September, divides all future contributions from retirement fund members into two components: a savings component and a retirement component.
“The aim of the two-pot retirement system is to preserve your retirement investment, while allowing you access to the savings component once per tax year in case of emergencies, where not withdrawing would lead to worse financial outcomes,” Carter explains.
As well as the retirement and savings components, there is also a vested component, which consists of retirement contributions accumulated before 1 September and growth on it, less the amount used to “seed” your savings component.
Carter says although investors will not be able to make further contributions to this portion, they may be able to access it in certain circumstances, including if they resign, if their retirement fund’s pre-two pot rules allow it.
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Why it‘s important not to withdraw under two-pot retirement system
He believes that for many investors, especially those who have been investing diligently for several years, keeping a lid on the vested component is even more important than not dipping into the savings component.
“For example, for a 55-year-old investor who has been contributing to a retirement fund since he was 25 and who intends to retire at 65, the vested component (plus growth) could be as much as 90% of the amount available at retirement.
“For these investors, the most important thing to do is to make sure that the vested component remains invested appropriately and resist the urge to take this money out.”
What about using your savings component as an emergency fund? Carter says this could make sense if you are willing to direct emergency fund contributions into your retirement fund, over and above what you are currently contributing to your retirement fund.
He explains that if you were previously contributing 12% of your salary for retirement and that was enough, dipping into the one-third of your contributions that now go into a savings component for emergencies will leave you with a shortfall.
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If you withdraw now, you will not have enough to retire
“To the extent that you use this one-third for emergencies, you will be eating into your retirement investment and all else being equal, you will not have enough at retirement.
“However, using the example above, if you want your retirement vehicle to double as an emergency fund, you could increase your pre-tax contribution to 18%. If you do not need it for emergencies, or even if you use some of it, but not the full amount, it could enhance your retirement investment. Even if you end up needing all of it for a rainy day, you will not worsen your retirement outcome.”
What about festive spending then? Carter says rather than dipping into your retirement investment to fund your festive season splurge, discipline should be your first priority. “Marketing tricks entice us to spend, but it is important to protect your future financial well-being.”
Although it may be too late for this festive season, a strategy for the future is to set aside money monthly to account for this expensive time of year, he says. “Regular contributions over time into a low-risk unit trust, such as a money market or interest fund, will preserve and grow your capital, and you can access it when you need to.”
