Retirement

Financial implications of withdrawals from a retirement fund before retirement

The two-pot retirement system, which came into effect on 1 September 2024, grants members access to a portion of their retirement savings, to assist in times of financial hardship. Members are now able to make one withdrawal from their savings component per tax year. This article tackles the financial implications of making withdrawals from a retirement fund before retirement under the two-pot retirement system.

Proceed with caution

"Members should be aware of the financial implications of such a withdrawal, some of which as outlined below."

Debt may reduce the withdrawal amount: Members who make withdrawals, may end up with smaller withdrawal amounts than requested, due to outstanding debt to SARS, which is offset against these withdrawal amounts.

Certain benefits received within a retirement fund structure will be lost: Members who consider making withdrawals from their retirement fund might initially only focus on the immediate costs of a withdrawal, such as tax. However, there are significant long-term financial implications that will likely have a bigger impact on their retirement savings and will make it difficult or even impossible to recover the loss.

The money contributed to a retirement fund is intended to be preserved for a member until they retire. When a member makes withdrawals from their savings component before retirement, they take money from their future self, decreasing the capital they’ll have available to provide them with an income during retirement.

Along with the loss in capital, taking money from the savings component before retirement results in the loss of:

• tax-free investment income (in the form of interest and dividends)
• protection of that capital from creditors
• exclusion of the capital from estate duty, and
• compound growth on the capital.

Example

The consequences of losing out on compound growth

The incredible power of compound growth is not to be underestimated. A withdrawal from your retirement savings may have a greater impact on your retirement capital than you think, as demonstrated by the example below:

Hannah and Marissa are 35, and both are members of a retirement annuity fund. Both have retirement savings of R3 000 000 each making a monthly contribution of R5 000 to the fund. Under the new two-pot system, their retirement savings are split as follows:

Vested component	R2 400 000
Retirement component	R 400 000
Savings component	R 200 000
TOTAL	R3 000 000

Hannah decides to take a one-off withdrawal of R200 000 from her savings component, while Marissa does not make any withdrawals.

The table below summarises Hannah and Marissa’s projected retirement savings at age 65:

	Hannah	Marissa
Projected retirement savings at retirement (in 30 years)	R35 218 192.23	R37 230 723.60
Projected retirement savings lost due to withdrawal	- R2 012 531.38

This example assumes an annual growth rate of 8% for the funds invested across the three components for 30 years and a 0% annual increase in contributions.

Due to the withdrawal, Hannah will have R2 012 531.38 less than Marissa when they retire at 65. This amount could have been added to the amount available to take as a cash lump or the amount used to purchase an annuity to provide her with an income during retirement.

Furthermore, if Hannah wanted to make up for the withdrawal over the 30 years, she would need to contribute an additional R1 428.80 per month (R17 145.60 per year) to the fund.

Members are encouraged to carefully consider their options and consult their financial intermediary before making withdrawals from their savings component. There are alternative investment solutions that can be used for emergency savings, to avoid dipping into the savings component before retirement and losing out on compound growth and other benefits.

Article source: Glacier by Sanlam
Glacier Financial Solutions (Pty) Ltd is a licensed financial services provider.

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