With the Two-Pot Retirement System set to be implemented, Old Mutual Retirement Reform Executive, Michelle Acton, gave insight into how it’s likely to impact low income households.
The two pot system divides retirement contributions into two pots - the Savings pot and the Retirement Pot. Acton said a third of contributions would go into the Savings Pot, which can be accessed before retirement, for emergencies. The remaining two-thirds will be allocated to the Retirement Pot, which is preserved for retirement. The new system provides for immediate financial relief while ensuring long-term savings.
Acton explained that, “The flexibility offered by the Savings Pot is important, but it’s equally important that South Africans understand the long-term impact of accessing retirement funds prematurely, this is especially true for low income households. Income inequality in South Africa is driven by a complex interplay of factors. High unemployment rates leave a significant portion of the population without a stable income, while those who are employed often earn low wages.”
Additionally, she said there was a vast income disparity between the rich and the poor, with the wealthiest 10% of households accounting for a substantial portion of the nation's total income.
To safeguard South Africa’s retirement savings, she said it was necessary to establish clear guidelines on withdrawal limits and frequency.
Acton highlighted the necessity of these measures: “There are regulations in place to manage access to the savings pot, such as limiting access to a single withdrawal per tax year with a minimum of R2 000, this will maintain a balance between addressing immediate financial needs and preserving long-term retirement savings. This approach aims to prevent premature depletion of funds, which could leave individuals financially vulnerable in their retirement years.
“Additionally, comprehensive support systems, including financial advice, remains an important part of retirement planning to help South Africans to make informed decisions and navigate the complexities of the Two-Pot system effectively,” she said.
On retirement preservation, Acton said the Retirement Pot was another important measure, saying that by safeguarding two-thirds of the contributions until retirement, one would be able to promote long-term financial stability more so for low income households.
“This approach ensures that the majority of savings remain intact, providing a secure foundation for our members’ retirement. Efforts to address inequality in South Africa must go beyond the Two-Pot system. It is essential to direct the benefits of economic growth and redistribution policies to those at the bottom end of the income distribution. Raising incomes at the bottom, creating new opportunities and employment, and ensuring that the benefits of growth do not disproportionately favour the wealthy are crucial steps,” she explained.
Acton added, “We need to encourage preservation over premature withdrawal, ensuring that financial relief today does not compromise financial security in the future. This is crucial for protecting the vulnerable and promoting a culture of saving.”
She said the Two-Pot system represented a significant step towards addressing income inequality in South Africa.
“By providing a balance between flexibility and preservation, it aims to protect vulnerable low-income households while promoting long-term financial security.
“With the right safeguards and a commitment to education, the system has the potential to significantly improve retirement outcomes for all South Africans,” Acton concluded.
Saturday Star