The retirement landscape in South Africa stands on the precipice of transformation as the two-pot system inches closer to its proposed implementation date of March 2024. Representing a vital shift in the country's retirement savings regime, the intricacies of the two-pot system continue to fuel industry debates. Old Mutual's modelling of the system has yielded insightful results.

According to the analysis, individuals who refrain from withdrawing their retirement savings for two decades preceding their retirement could potentially reap returns of up to nine times their annual salary. In contrast, those who opt for multiple withdrawals, accessing their savings two or more times every five years leading up to the 20-year milestone, may anticipate returns closer to four times their yearly earnings.

Gontse Tsatsi, Head of Retail Clients at Old Mutual Investment Group, explains that individuals who exercise financial discipline, abstaining from accessing their savings and maintaining 100% preservation, thereby optimising time in the market and taking advantage of compounding, are poised to outperform their counterparts who opt for the alternative. However, those who take a full withdrawal at the 10-year mark or those who annually withdraw their entire savings pot may find themselves at a disadvantage in the long term.

Although withdrawals within the two-pot system might initially weaken retirement savings, Tsatsi asserts that over time, investors have the potential to recover these savings. "It's imperative to acknowledge that, eventually, withdrawals from one pot will be offset by consistent earnings from the other, resulting in the preservation of two-thirds of all pension savings."

Although the system has clear advantages, Tsatsi underscores the need to resist the allure of relying on retirement funds for emergency situations. "While immediate financial exigencies may tempt individuals to prematurely access their retirement funds, our analysis underscores the substantial advantages of preserving these funds for the long haul. Retirement funds are intended to secure a comfortable retirement and should not be utilised as a stopgap measure for emergencies."

Investment mandates within retirement fund products are another crucial consideration, as Tsatsi highlights the implications of Regulation 28 of the Pension Funds Act. "Investments within a retirement fund are subject to the guidelines of Regulation 28, which determines the parameters governing the allocation of retirement savings. This framework ensures appropriate diversification to manage risk. Investors  should remain cognizant of its inherent investment goal, which is long term in nature, and that withdrawing in the short to medium term may not be the best thing to do."

Tsatsi also addresses another critical aspect overlooked when contemplating the utilisation of the two-pot system for emergencies—the loss of retirement tax benefit and withdrawal costs. "Initiating withdrawals from retirement funds triggers the forfeiture of tax benefits, and associated withdrawal costs can erode savings. The cumulative effects of these factors can ultimately culminate in diminished retirement savings. Qualified and licenced financial planners or advisers are best placed to advise investors on long term financial planning and investors should seek council from them for actions that might impact their financial goals.”

Instead of looking to their retirement funds for emergencies, Tsatsi advocates for individuals to establish their own financial safety nets through unit trust solutions. These types of savings solutions empower individuals to craft their own investment strategies and can access their funds anytime they want. This approach offers key advantages, including flexibility, unhindered access, and optimal control over one's investments.

"As the era of the two-pot system beckons, individuals need not wait for its implementation to secure their financial well-being. Creating one’s own personalised  savings fund through unit trusts, for emergency savings and defined savings goals such as a house or car, provides for unparalleled control and flexibility, bolstering financial security for both retirement and unexpected life emergencies."

Tsatsi  reasserts that the value of a qualified and licenced financial planner or adviser on this journey cannot be overemphasised. Their counsel plays a pivotal role in shaping a comprehensive strategy that encompasses retirement planning and preparedness for unforeseen circumstances. Most importantly, they have been successfully navigating these complex aspects for their clients successfully for a long time, helping them build wealth.

"The guidance of a qualified and licenced financial planner or adviser remains an instrumental compass for navigating the intricacies of financial security and achieving financial freedom," concludes Tsatsi.