In the current tough economic climate, many employees are finding themselves in need of additional funds to cover various expenses. Home or car expenses, and short-term debt, drove withdrawals under the new Two-Pot retirement system. As an employer, understanding the reasons behind withdrawals can help you better support your workforce and address their financial wellbeing.
Home or car expenses, and settling short-term debt, were the top reasons Discovery Corporate and Employee Benefits' pension and provident fund members gave for withdrawing from their savings pot.
The Two-Pot retirement system was implemented in September 2024, giving South Africans access to one-third of their retirement savings once a year, while preserving two-thirds for retirement.
Guy Chennells, Chief Commercial Officer at Discovery Corporate and Employee Benefits, explained that the data was gathered from employees who submitted withdrawal requests via a secure and user-friendly WhatsApp channel.
"Responses showed that the main reason our members withdrew from their savings was to resolve home or car expenses (24%). This was closely followed by a need to pay off short-term debt (21%)," he said. "We found it surprising that a big group of members (20%) were using the extra money for education, presumably in the majority of cases for children's school fees, as well as for day-to-day expenses (11%). Sadly, these are all indications of the cost-of-living crisis faced by so many," he said.
Chennells explained that if members chose the 'Other' category as their Two-Pot withdrawal reason, they were asked to give a written example of what 'Other' meant for them.
"While a notable 17% of members selected 'Other' as their motive for withdrawal, most of the reasons given here were for home improvements and renovations," he says. "This isn't really recommended as a good use of Two-Pot savings because it does not truly classify as 'emergency spending'. 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."
READ MORE: What should constitute an emergency?
Travel was only selected as a reason for withdrawal from Two-Pot savings by 1% of members. This is a good sign that most people were not accessing their Two-Pot savings for a whimsical escape to the beach or bush.
Members aged from 35 to 45 years old have highest number of Two-Pot withdrawal requests
A total of 22% of members who were eligible to withdraw chose to make a withdrawal in September. Of this total, if we were to split our middle-aged people into two separate age groups of 35 to 45, and 46 to 55, we note that those individuals who are aged from 35 to 45 years old have taken the highest total number of withdrawals from their accumulated retirement savings (27% of those eligible).
"This figure emphasises the pressures facing South Africa's 'sandwich generation', who are battling to support young children while potentially being responsible for their older parents too," adds Chennells. "This is worsened by the recent high-inflation cycle, increased debt and electricity costs, and other cost-of-living pressures which have devastated household finances, especially for families."
Of the 22% of total withdrawals recorded during September, it's interesting to note the range of withdrawal rates that Discovery's Corporate and Employee Benefits' data set highlights a range: From over 40% for those who are middle-aged with a low- to medium-income (low: R0 to R125,000 per year; medium: R125,000 to R500,000 per year), to less than 1% for those individuals over 55 years old who also had very high income (over R1 million per year).
"By age alone, withdrawal rates were similar for the young and middle-aged (around 25%), but about half that for the over 55 group (13%)," says Chennells. "Income was a much stronger driver of withdrawal rates with low-income claimants at 38%, middle-income at 29%, high-income at 12%, and very high-income claimants at just 4%."
Qualifying for withdrawal in the Two-Pot retirement system after 1 September 2024
Chennells cautions that withdrawal rates during September should be understood in the context that many people did not qualify for a withdrawal for two key reasons:
- If there was less than R2,000 in their savings account from the seeding, claimants were not allowed to withdraw; and
- If claimants are in the over-55 age category, they must physically opt in to the Two-Pot regime before 1 September 2025 for their seeding to occur.
The data revealed that claimants' eligibility to make a Two-Pot withdrawal was different by age and income.
By age, 45% of those under 35 qualified in September, 71% of those from 35 to 55 (middle-aged) qualified, and 61% of those over 55 were eligible. For those over 55, a further 20% would have enough savings to qualify if they opted in (which they are able to do before September 2025).
By income the data is even more stark. Of those earning R125,000 per year or less (low-income), only 34% were eligible.
"As this is the group with the highest claiming rate, withdrawals overall would have been much higher without the R2,000 minimum requirement," notes Chennells. "It also means that withdrawals are expected to rise by the end of the year as savings components grow with contributions and investment returns."
Of the middle-income group (R125,000 to R500,000 per year), 67% qualified, while 83% of the high-income group (R500,000 to R1 m per year), and 90% of the very high-income group (above R1 m per year) qualified.
Guidance and advice work
Even though the daily withdrawal volumes recorded were so much higher than usual from 1 September, only 22% of Discovery Corporate and Employee Benefits' members who qualified to withdraw have done so, to date.
"So far, Two-Pot withdrawals have been lower than our team expected, and we hope that some of this is due to people changing their minds about dipping into their retirement savings," says Chennells. "Understanding other options for short-term capital, or how much more you will have to contribute to your fund later if you withdraw, or how much you will lose to tax, has proved critical in helping people make the right decisions."
"There might be another spike in withdrawals in November during Black Friday, possibly another at Christmas and a third early next year, as 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. They realise that the more disciplined you are about not withdrawing, the more you will have available if one day you really do need it," Chennells concludes.