Why 22% of Discovery members have taken money out under two-pot

Many need for funds to cover expenses, with low-income claimants at 38% and very high-income claimants at 4%.

Almost a quarter of Discovery members who opted to withdraw money from their savings component under the two-pot regime indicated they would use the money for car and home expenses. Two out of 10 wanted to pay off short-term debt.

This is according to data gathered by the group’s corporate and employee benefits businesses, which captured claimants’ motivations for withdrawing funds.

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The company found it surprising that a big group of claimants (20%) said they would use the money for education.

“[P]resumably in the majority of cases for children’s school fees, as well as day-to-day expenses,” says Guy Chennells, chief commercial officer at Discovery Corporate and Employee Benefits.

“Sadly, these are all indications of the cost-of-living crisis faced by so many.”

Chennells emphasises that income was a strong driver of withdrawal rates – with low-income claimants at 38%, middle-income at 29%, high-income at 12%, and very high-income claimants at 4%.

The majority of the 17% of claimants who selected ‘other’ as the reason for making a withdrawal said it was for home improvements and renovations.

“This isn’t recommended as a good use of two-pot savings because it does not truly classify as ‘emergency spending’,” says Chennells.

“It’s still understandable though, because South Africans who want to improve their lives are simply unable to create discretionary spending from their regular income at the moment.”

Travel was only selected as a reason for withdrawing from their retirement savings by 1% of claimants.

“This is a good sign that the majority of individuals were not accessing their two-pot savings for a whimsical escape to the beach or bush.”

Billions flowing out

South African retirement funds have seen billions of rands’ worth of withdrawal requests since the two-pot system came into effect at the beginning of September. Under the regime, one-third of members’ retirement contributions are allocated to a savings pot, while two-thirds go into a retirement pot that may only be accessed upon retirement.

Read:
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Discovery’s data indicates that of those who were eligible to withdraw from their savings, 22% opted to do so in September.

Of this total, if middle-aged fund members are split into separate age groups (35 to 45 and 45 to 55), the younger of the two groups accounted for the highest number of withdrawals (27% of those eligible).

This corresponds with observations from Sanlam.

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Discovery says daily withdrawal volumes recorded in September were higher than usual, but lower than expected.

“[We] hope that some of this is due to people changing their minds about dipping into their retirement savings,” says Chennells, adding that members’ understanding of tax implications among other things has proven critical in helping them make the “right decisions”.

Read: Eye-watering taxes await those who withdraw funds under two-pot

Possible withdrawal spikes expected 

Chennells cautions that there might be another “spike” in withdrawals in November during Black Friday, as well as over Christmas and early next year when the new school year starts.

“However, the relatively low percentage of overall withdrawals shows that most people understand they must only draw on their savings pots in genuine financial emergencies.”

The modelling done by the South African Reserve Bank (Sarb) in August under a (likely) moderate withdrawal scenario estimates that a total of R40 billion will be withdrawn from people’s pension funds in the fourth quarter of 2024 under the two-pot system.

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It predicts that for 2025 (under the same moderate scenario), withdrawals should drop to R20 billion, spread evenly over the four quarters of the year. In 2026, it sees withdrawals increasing slightly to R21 billion.

The Sarb expects the net outflow from pension funds under the two-pot system to peter out in about eight to 10 years, with pension fund assets then stabilising.

“Longer term, the economy at large would benefit from employees retiring with a larger pool of retirement savings stemming from the two-third investment pot, which they will only be able to access on retirement,” it notes.

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