Africa-Press – South-Africa. Old Mutual has warned South Africans against early withdrawals from their retirement funds for discretionary spending on holidays, electronics and cars.
These withdrawals, allowed under the new two-pot retirement system, will significantly impact financial outcomes in retirement.
Old Mutual Personal Finance’s Sean van Zyl explained that the system was designed for withdrawals to only be used for emergencies.
The two-port retirement system was designed to improve financial outcomes in retirement by enabling limited early withdrawals to provide relief in the immediate term.
It was designed to prevent individuals from having to withdraw their entire savings to cope with short-term financial distress, thereby effectively eradicating their funds for retirement.
However, Van Zyl said that Old Mutual’s data points to a concerning trend where individuals are withdrawing funds for discretionary spending and not emergencies.
“Rather than reserving these funds for genuine emergencies, we are seeing withdrawals being used for discretionary spending such as Black Friday purchases, holidays, upgrading cars and electronics,” Van Zyl said.
“In some instances, this is even premeditated, with individuals planning at the start of the year to use their savings pot for such expenses.”
Many choose to proceed without consulting their financial advisers, giving asset managers little space to help clients understand the severity of the decision they are making.
Van Zyl explained that a common misconception is that individuals believe they can make up the shortfall later through increased savings when wages are higher or financial conditions improve.
“In practice, it rarely happens. Instead, individuals give themselves false hope and effectively gamble with their retirement prospects,” Van Zyl said.
Withdrawing funds early from your retirement savings can have severe negative effects later on life, with the compounding process being broken and the amount that is compounded being reduced.
Van Zyl said early withdrawals tend to indicate poor financial health in a broader sense, with emergencies not being paid for through emergency savings and discretionary spending not be budgeted for.
Tax implications
Another factor that is often forgotten is the significant tax implications of early withdrawals, with SARS likely to take a significant chunk of the withdrawal before it reaches your bank account.
This is coupled with the fees levied by asset managers to process the withdrawal, which further erodes the potential cash received by the individual.
However, Van Zyl explained that, when it comes to withdrawals, the urgency to access cash outweighs any consideration of the cost.
“This approach is particularly dangerous when dealing with retirement savings, where the long-term consequences are significant and often irreversible,” Van Zyl said.
“The tax consequences alone should give people pause, but too often we see individuals accessing these funds without fully understanding or even considering the cost.”
Accessing the savings pot of your retirement savings causes a spike in income and results in additional income tax to be paid, making the withdrawal less attractive.
If someone sees they have R30,000 R 30 000 in their savings pot and makes a withdrawal, SARS will recover tax up to 45% against the withdrawal.
SARS also has the ability to recover any unpaid taxes from this withdrawal, potentially making its chunk significantly larger.
Van Zyl said the savings pot should be treated as a last resort, existing to address genuine needs when under substantial financial pressure.
To illustrate the real cost of early withdrawals, Old Mutual Personal Finance prepared a scenario over a five-year period, with outcomes measured at retirement –
Scenario starts on 1 September 2024 with two investors, A and B, each with R250,000 in retirement savings
Savings pots each seeded with 10%, resulting in R25,000 in savings and R225,000 in the retirement pot
Each makes a monthly contribution of R2,000 split between pots, with about R667 to savings and R1,333 to retirement, with both pots growing at an annual return of 6.5%, compounded monthly
A withdraws the full savings pot balance each year from 2025 to 2029, while B makes no withdrawals and remains fully invested
From 2030 to retirement in 2040, both investors stay invested with no further withdrawals
At retirement, A accumulates about R1,214,000 while B reaches about R1,386,000
“The difference of roughly R170,000 is driven purely by behaviour, despite identical contributions, returns and fees,” van Zyl said.
“The numbers make it clear. Even relatively small, repeated withdrawals early on can result in a significant loss at retirement. Once that compounding advantage is lost, it cannot be recovered.”
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