Two-pot system: To withdraw or not?

As the two-pot retirement system in South Africa marks its second anniversary, the focus remains on the balance between withdrawing funds and preserving savings. Senior employee benefits consultant Nic Whittles from BDO Wealth emphasizes that one of the system's key advantages is the preservation of a significant portion of retirement savings, even throughout a member's working life.

Under the two-pot system, two-thirds of new contributions are directed to a retirement component that remains invested until retirement, while one-third goes to a savings component that can be accessed under specific conditions.

However, withdrawing from the two-pot system comes with its own set of drawbacks. One major negative aspect is the higher tax rates applied to withdrawals, which are taxed at the individual's normal marginal income tax rate rather than the more favorable lump-sum retirement rates. This can significantly decrease the payout members receive.

Additionally, removing funds from the system results in the loss of compound growth potential, meaning that each withdrawal reduces the amount that could have generated future investment returns. Administrative fees associated with processing early withdrawal requests further diminish the net cash received by the members.

While some individuals, like Tebello Mokhotso and Koloti Mokoena, have considered withdrawing from their two-pot retirement savings for urgent financial needs, they ultimately decided against it due to the long-term negative implications. Mokhotso pointed out that withdrawing reduces the amount received due to tax deductions and eliminates potential tax refunds.

Mokoena, on the other hand, was unaware of the tax consequences and the significant reduction in his funds when he withdrew the maximum limit of R30,000 in 2025. He only received around R18,000, with no tax refunds when filing his tax returns.

Whittles underscores the importance of understanding the long-term costs of withdrawing funds from the system. He believes that the system's main benefit is encouraging members to remain invested and enjoy the compounding effects over time. "Compounding growth can dramatically impact retirement outcomes when money remains invested for 20, 30, or 40 years," he notes. "Every withdrawal not only reduces the invested amount but also the potential future growth that money could have generated."

To illustrate this point, Whittles provides a scenario based on a member earning R35,000 per month, contributing 10% of their salary to a retirement fund. After 10 years, if the member remains invested and preserves their savings, they could accumulate approximately R717,000. Conversely, if they withdraw R21,000 from the savings pot every two years, their total could drop to R585,000 over the same period—a loss of around R132,000.

The difference becomes even more pronounced over 20 years, with the member who continues to invest potentially gaining an additional R481,000 compared to the one who withdraws regularly.

Whittles concludes by highlighting the importance of providing members with adequate support when making withdrawal decisions. These decisions should take into account immediate financial needs, tax implications, and the long-term impact on retirement savings. Employers, benefit consultants, and financial planners play a crucial role in guiding members through this complex process, ensuring they make informed choices that maximize their retirement benefits.