Two-pot retirement system withdrawals - weigh the pros and cons

Withdrawals from the savings pot of the two-pot retirement system must be considered from several perspectives before being accepted as a solution for short-term financial challenges.

This is according to Stian de Witt, head of Financial Planning, NMG Benefit. 

The new retirement system, which was implemented on September 1, 2024, gives South Africans the opportunity to withdraw a portion of their retirement savings before retirement and, for many, this lump sum offers a financial lifeline.

The South African Revenue Service (Sars) has reported receiving 2,664,279 applications for two-pot withdrawals within five months of the system being implemented and R43.42 billion having been withdrawn while Alexforbes revealed that by January 30, 2025, they processed 370,000 claims with a total value exceeding R7 billion. 

Considerations

De Witt said that the first consideration is that such withdrawals are taxed, and the applicable tax rate may be much higher than you think. 

Two-pot withdrawals are taxed on your marginal rate, which is the rate relevant to the last rand you earned and is often much higher than your average tax rate.

However, if you wait until retirement before a withdrawal, a portion of it will be tax-free.

"Taking money out of your retirement savings early not only incurs steep tax, but it also means that you are reducing the amount that you could potentially withdraw tax-free if you wait," De Witt said. 

John-Paul Fraser, tax attorney, Tax Consulting SA said that fund members should keep in mind that noted that withdrawing from the savings pot can indeed push the taxpayer into a higher tax bracket.

"This is the case as the withdrawals from your savings pot are seen as income in the same light as that of remuneration income, Fraser said.

Another important consideration is that withdrawing from the two-pot system means tapping into your retirement savings that are there to support you when are considered too old to earn an income.

Making a withdrawal means that you will reduce the amount available to carry you through your retirement years.

Withdrawing before retirement will immediately cut into the capital amount available for your retirement which mean that you will also start losing out on compound interest and the long-term effects will be major.

According to De Witt, the implications could result in you having to downscale your lifestyle, become financially dependent on others, or rely on social grants.

While there are risks associated with early withdrawals, De Witt also acknowledges that accessing some of your retirement savings might be a sensible, viable option if you are facing:

- a medical emergency

- job loss

- eviction

- loss of assets

- legal trouble

- excessive high-interest debt.

The best way to avoid dealing with the long-term consequences of withdrawing from your retirement savings early is to proactively strengthen your short-term financial security, according to De Witt. 

You should partner with a financial adviser who can help you to budget and plan properly.

You can do this by:

- spending less than you earn

- starting an emergency fund that can cover three to six months’ worth of expenses

- avoid taking on unnecessary interest-bearing debt.

"Withdrawing savings under the two-pot system should be a last resort, not a default option. Remember that retirement is a marathon, not a sprint, and so you should focus on ensuring that you have enough at the finish line instead of using up your fuel too soon," De Witt said. 

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