The government’s recent move to introduce a two-pot retirement system seeks to help individuals navigate through financially challenging times. However, this system, which permits limited withdrawals of up to a third of one’s retirement funds, comes with its own set of considerations, notably on long-term financial impact.
In the forthcoming system, retirement funds are divided into two categories – a ‘savings pot’ that offers the flexibility of making a withdrawal once every 12-month period. This mechanism can provide immediate relief in times of financial stress. But, it’s essential to understand the ripple effects of drawing from these savings.
The Scenario Analysis: Thabo vs. Mandla
To illustrate the potential impact, consider two 40-year-old individuals, Thabo and Mandla. Both decide to secure their retirement by contributing R1,000 per month to the same Retirement Annuity (RA) fund, growing at a rate of 10% per annum.
Thabo opts to utilise the new two-pot legislation, withdrawing 10% every 12 months to assist with various emergencies. On the other hand, Mandla continues to let his investment flourish at the growth rate of 10%. After 20 years, Thabo has R230,175 in his RA, while Mandla’s savings have skyrocketed to R723,987 – over three times more than Thabo. Additionally, Thabo’s withdrawals are taxable, further diminishing his net savings.
This example underlines the compounding effect of withdrawing from your savings over time, an action that should be viewed as a last resort and not a regular occurrence.
Generational Wealth: A Paradigm Shift
Retirement’s financial implications often rest heavily on the younger generation, which is frequently expected to support their retired loved ones. However, there’s a growing need to explore strategies for creating generational wealth, allowing for a secure retirement while also ensuring the financial stability of future generations.
This process may start with consulting a financial adviser, who can provide guidance to avoid potential financial pitfalls and help foster a shift in creating generational wealth.
The Two-Pot System: A Balancing Act
Until recently, individuals were unable to access their retirement savings until reaching the retirement age of 55 years or upon resignation from their employment. The latter often led to an unfortunate tendency to cash out retirement funds to alleviate immediate financial burdens, posing a significant challenge to long-term retirement funding.
The two-pot system introduces the flexibility of accessing money from the savings pot, creating a more dynamic approach to retirement saving. This move is inherently positive, fostering interest in retirement saving, flexible financial planning, and a heightened awareness of investment options.
However, this system is indeed a double-edged sword. While it allows for immediate financial relief, frequent withdrawals could significantly impact the end value of the savings pot. As such, if a client isn’t in a tight financial corner, it’s recommended to continue saving rather than accessing their retirement funds.
For those seeking advice on how best to navigate this new landscape, Liberty Advisers can provide insight on how to grow and protect your wealth within the context of this two-pot system. The new era of retirement savings calls for careful consideration, where flexibility needs to be balanced with long-term financial sustainability.
