Effective money management is important now more than ever especially after the recent reforms to South Africa’s retirement savings framework, according to Jacques Erasmus, senior executive manager, Assupol.
The recent reforms to SA’s retirement savings systems refers to President Cyril Ramaphosa signing the Revenue Laws Amendment Bill of 2023 which establishes the two-pot retirement system.
While the two-pot retirement system will only come into effect on September 1, 2024 most South Africans find themselves unprepared for retirement with a 2022 National Treasury survey revealing that only 6% of South Africans will retire comfortably.
Erasmus said: “This alarming statistic demonstrates the urgent need for effective financial strategies, particularly with the emergence of the new two-pot system.”
Here are three questions you need to ask your financial advisor about the two-pot retirement system.
Are there any tax implications or penalties for withdrawing from the savings pot before retirement?
According to Erasmus, one of the most significant features of the two-pot retirement system is the ability to access funds from the savings pot before retirement.
However, it is crucial that people understand the tax implications and potential penalties associated with early withdrawals from the savings pot.
“Withdrawals from the savings pot are subject to taxation, with the amount withdrawn added to your taxable income for the year, which could push you into a higher tax bracket,” Erasmus said.
What are the benefits and risks associated with the savings pot?
Erasmus said that the savings pot within the two-pot system has both advantages and potential drawbacks that people must take into careful consideration.
The primary benefits of the two-pot retirement system include liquidity and flexibility.
“Immediate access to funds provides a financial safety net for emergencies, reducing the need to incur debt. Moreover, funds can be used for various purposes such as medical expenses, home repairs, or education costs, offering significant financial freedom,” Erasmus said.
While there are advantages there are also risks.
Frequent withdrawals from the savings pot can cut down the amount of money that you have saved up for your retirement. This could compromise your long-term financial security.
Plus if you are not disciplined with your financial planning there is a risk of you spending the funds on non-essential items which deplete your savings that is meant for essential needs.
To mitigate these risks, people should consider:
- Setting clear goals for withdrawals
- Establishing a detailed budget that accounts for both immediate and long-term needs
- Using the savings pot in a disciplined manner by prioritising real emergencies or significant financial crises
What savings options or emergency funds should you consider to avoid over-reliance on the savings pot?
To ensure that your retirement savings are sustainable, people need to explore alternative savings options and establish emergency funds so they can avoid over-reliance on the savings pot.
“Consider high-interest savings accounts, which offer higher returns than regular savings accounts while remaining accessible,” Erasmus said.
Fixed deposits are another option that offer better returns over a set period by encouraging disciplined savings due to limited access.
Erasmus said: “Additionally, investment accounts that allow for regular contributions to stocks, bonds, or mutual funds can offer long-term growth.”
Besides alternative savings options, people can also start saving towards an emergency fund. The emergency fund should be able to cover 3-6 months of living expenses.
Erasmus said that engaging with your financial advisor to develop a comprehensive strategy that aligns with your goals allows for a stable and prosperous future amidst these new retirement reforms.
IOL Business