Pension fund members hope to pay off some debts from their two-pot retirement system withdrawals as financial pressures force 50% of consumers to cash in their retirement funds in an environment where even high-income consumers are failing to pay their home loans. And if they use money from Peter to pay Paul, they will also have to pay the tax man.

According to Sanlam Benchmark research that will be revealed next week, Sanlam found in 2022 that just 31% of respondents said they would access funds from their two-pot retirement savings component. Now, in 2024, this figure jumped to 59%.

“The two-pot retirement system may address the problems of the present but in a nation where under 10% of the population can afford to retire comfortably, what will the ramifications be later? What alternatives can we give people now to empower them to preserve their retirement savings while alleviating some of their current cash crunch?” asks Kanyisa Mkhize, CEO of Sanlam Corporate.

DebtBusters’ Debt Index for the first quarter of 2024 found that the debt-service burden is high, with the average debt-counselling applicant using 62% of their net income to repay debt. The situation is worse among higher-income earners.

The debt-to-income ratio for people taking home more than R20 000 per month is 127%, while it is 172% for those earning R35 000 or more. These ratios are at or close to the highest ever.

ArcelorMittal spends R6 billion in taxes
Number of people who want to withdraw their savings component after 1 September increasing

Mkhize says research indicates that rising financial pressures on consumers have led 50% of respondents to cash in all their retirement funds. “This marks a regression from the 35% who did so in 2023. These findings underscore the importance of the two-pot retirement system, which aims to encourage and maintain savings throughout an individual’s career.”

However, she says, well-intended regulatory changes can have dire consequences down the line depending on execution. Clear communication, meticulous planning and implementation are needed to ensure that policies achieve their goals without unintended negative consequences.

“As the financial services sector, we must find more ways to preserve the wealth of our retirement fund members, before and after retirement. Sanlam’s north star is to empower Africans to be financially confident, secure and prosperous.

“Our sustainability strategy is deeply entwined in this mission, with the aim to contribute towards the seven Sustainable Development Goals. Importantly, we want to change people’s stories and help them build long-term prosperity for their future selves and their families,” Mkhize says.

Sanlam’s Benchmark research is a seminal body of research that sets an annual benchmark for the nation’s financial mood and this year, with the two-pot retirement system and national health insurance (NHI) top of mind, the research focuses on health and wealth, two key levers for accelerating a better working South Africa.

How systemic problems arise and how to prevent them

“We are excited to uncover our findings around our theme of ‘Accelerating a better working South Africa’, which delves into how systemic problems arise and what should be done to prevent them at the source,” says Mkhize.

“With 2024 marking 30 years of democracy for our nation, we know there’s a lot to fix. We know lifestyle changes can relieve the burden and expense of non-communicable diseases on the nation. Similarly, we know what needs to be done to change people’s retirement outcomes,’ she says.

“The challenge remains to overcome shared challenges at a macro and individual level. Corporate South Africa has a crucial role in leading the change that is needed. It will take collective will to accelerate a better working South Africa,” adds Mkhize.

A spokesperson for Alexforbes’ pension fund team also says that its member insights show that the debt levels of members are generally moderate to high. For example, 25% of loans are in default. “Our assumption is that many members withdrawing from their retirement funds use the savings to pay off debt.”

“Paying tax on money you will use to pay off debt is also not a good idea. With the imminent rollout of the two-pot retirement system, Old Mutual is calling on financial advisers to caution retirement annuity investors and pension and provident fund members about the tax pitfalls of early withdrawals,” says Sean van Zyl, a certified financial planner at Old Mutual Personal Finance.

Financial advisers must warn consumers about tax involved with the two-pot retirement system

Van Zyl stresses the need for advisers to inform customers that accessing funds from the savings pot before retirement can inflate taxable income, leading to higher tax liabilities and potentially jeopardising financial stability in their retirement years.

“Any amount you withdraw annually is added to taxable income for that tax year, potentially increasing tax liability significantly, especially if they are in a high-income tax bracket. If you contribute to a retirement annuity to benefit from a tax-deductible contribution, the full portion taken from the savings pot is 100% taxable upon withdrawal, negating the initial benefit,” Van Zyl warns.

This immediate tax burden can erode the funds available for short-term needs, making early withdrawals less cost-effective compared to other liquidity options, he says. “It is also important to highlight to customers that money withdrawn from the retirement savings pot is no longer invested, which reduces the compounding growth potential of their retirement savings.”

He points out that frequent or substantial withdrawals from the savings pot mean that less money is left in the retirement fund to grow over time, diminishing the total amount accumulated by the time you retire.”

Van Zyl calls on financial advisers to navigate these complexities by educating customers on the new two-pot retirement system, encouraging emergency savings, promoting long-term planning, simulating tax scenarios and considering alternative liquidity options.

Rather find alternative funds than two-pot retirement system

“These alternatives can provide necessary funds without immediate tax consequences, preserving retirement savings. However, while using debt responsibly is useful, the Covid-19 pandemic showed how quickly credit can be revoked, highlighting the risk of overreliance on credit,” notes Van Zyl.

Van Zyl says thorough preparation and informed decision-making are key to maximising the benefits of the two-pot retirement system and ensuring long-term financial well-being while minimising tax liabilities.

Read more @citizen