South Africa has a dismal savings rate, with more money flowing out of retirement vehicles than being put in—and the Reserve Bank warns there is a slight chance the new two-pot retirement system will exacerbate the problem.

According to the latest 10X Investments Retirement Reality Report 2023, only 6% of South Africans are on track to retire comfortably.

A comfortable retirement means being able to afford 70% of your pre-retirement income during retirement.

The report is based on findings from the 2023 Brand Atlas Survey, which tracked the lifestyles of 15.4 million economically active South Africans.

The survey revealed that there has been minimal change in South Africans’ inclination to plan for retirement.

Most South Africans have not formally planned for retirement, and those who have are not confident that they will be able to support themselves in the long term due to inflationary pressures and the economic climate.

Deloitte’s South African Investment Management Outlook showed South Africa’s savings rate is shockingly low compared to its emerging market peers, at a dismal 0.5% in 2023.

The national savings rate measures the income households, businesses, and governments save. It is the GDP that is saved rather than spent in an economy.

The rate is calculated as the difference between a nation’s income and consumption divided by income. It is an indicator of a nation’s health as it shows trends in savings, which lead to investments.

Two-pot problem

An economic bulletin published by the South African Reserve Bank (SARB) on Friday (2 August) added that the retirement industry is currently in a net outflow position, with annual withdrawals from pension funds exceeding annual contributions to those funds.

It added that while the annual net outflow is likely to dwindle and the industry to reach a new steady state under the new two-pot system coming into effect on 1 September 2024, there is a small change that will make things worse in the near term.

Under the new system, an individual’s retirement fund contributions would be split between three components (or ‘pots’): the vested, savings, and retirement components.

The vested component contains all accumulated retirement fund contributions made until 31 August 2024.

After the implementation date, a one-time seed capital transfer of 10% (capped at R30,000) of an individual’s vested funds will be made to their savings account.

The remaining funds will stay invested, and access to these funds will only be permitted after retirement or upon resignation, as per the current legislation.

An individual’s retirement savings “pot” will consist of one-third of their net annual contributions made after the implementation date, including the seed capital transfer and future capital growth.

Access to the funds is allowed before retirement, with one withdrawal permitted per tax year, taxed at the individual’s marginal tax rate.

An individual’s retirement fund will comprise the remaining two-thirds of their net annual retirement contributions made after the implementation date, including future capital growth.

Under this new system, the Reserve Bank warned that there is a chance of a high withdrawal scenario.

In this scenario, the bank expects that in the fourth quarter of 2024, people will withdraw an additional R100 billion from the savings part of their pension funds.

This includes the initial investment and a third of their savings from 2024 due to new legislation.

This amount will be in addition to the historical withdrawal of R110 billion for the entire 2024 calendar year, which would exacerbate South Africa’s dire retirement crisis.

However, the report added that this is unlikely to materialise under the current environment.

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