Two-Pot demands new approach to retirement savings
Two Pot means that South African retirement funds can now also act as a last-resort savings bank. Being able to access your retirement savings for emergencies provides a social relief mechanism for people in real crises to secure funds without incurring punitive interest rates, resorting to loan sharks or having to quit their jobs to access their retirement savings.
The fact that people can now access some of their retirement savings for emergencies might also take the grudge out of contributing to employee benefit funds, increasing retirement contributions as South Africans realise they can access their money when in need.
Guy Chennells, GM and Head of Product for Employee Benefits at Discovery Limited, observes that "with Two Pot we now have a component of our retirement funds behaving like a last resort emergency savings pot, with the added benefit of tax-free contributions and growth, and low-cost institutional fees." To use this new tool responsibly, however, "something needs to change."
In a nutshell, if you were previously contributing at a rate that would give you a decent retirement outcome but think you might need to access your savings component before retirement, you need to contribute more.
Chennells explains that if you want your retirement contributions excluding your savings component to be the same at retirement as originally planned "you need to multiply your contributions by one-and-a-half." For example, if you contributed 12% of your income each month before Two Pot, you should now contribute 12% x 1.5, namely, 18%. This way, one third will go into your savings component (18% x 1 / 3 = 6%) meaning that you continue to invest the remaining - 12% - towards your retirement, exactly as before.
By adding a little more, "you don't need to be too concerned about occasionally accessing the savings component of your retirement fund when emergencies happen," explains Chennells. "And if you never end up needing it, all the better. No one ever complained about having too much saved up at retirement."
Looked at this way, Two Pot places a powerful savings tool in the hands of ordinary South Africans. To make Two Pot work for you, however, requires that "you contribute more when you have it, so that you have access to savings when you need it - without derailing your retirement journey," says Chennells.
Those unable to set aside one-and-a-half times more every month at first, should try to get there through incremental increases in contribution rates each year, or focus their efforts on avoiding or limiting access to their savings pot so as not to put their retirement readiness at risk.