Members of retirement funds face a decision every year regarding their savings pots – to use or not to use? The easy answer is: don’t use your savings pot as it will diminish your retirement benefits. However, the majority of South Africans face real financial, and immediate, challenges on a daily basis. The idea of reducing retirement income in 20 years’ time may seem to be their only option. And we have seen that since the inception of the two-pot system on 1 September 2024, the majority of retirement fund members have made at least one withdrawal from their savings pot.
In this article we’ll look at different uses of the savings pot, from an overall financial position, not just looking at lower retirement income.
Assumptions for fund credit projections
In order to analyse the different uses of the savings pot we will make these assumptions:
Using your savings pot as a deposit to buy a house
Many South Africans do not own a house. It is very difficult for employed South Africans to gain access to finance for housing. Even if you pass an affordability test, first time buyers could easily have to put in a 20% deposit. Accumulating this deposit is difficult. What if you use your savings pot for this deposit? When you retire, you will need housing. Plus if you own your own house you would not need to pay rent. Is the benefit of not paying rent worth the reduction in your savings pot by making a deduction for your deposit?
Sipho builds up his savings pot diligently over time. When he is 50 years old he decides to buy a house worth R3 000 000 (The equivalent to a house worth R800 000 in today’s money). He withdraws R1 000 000 from his savings pot as a deposit to buy this house. He has to pay tax at his relevant marginal rate of R362 000. Thus he gets R638 000 to use as a deposit.
The table below shows the result of this decision:
If Sipho did not make any deductions from his savings pot he would have R10 505 309 available at retirement. This would allow him to purchase a pension of R5 096 a month in today’s money. His overall pension (savings pot + retirement pot) would be R15 288 a month in today’s money. Versus his salary of R20 000 a month, this would be a reasonable pension for him to retire on.
Let us now take into account the deduction from his savings pot for the deposit on his house. The deposit on the house has earned a return of the rent income plus growth on the capital value of the house. If I make a reasonable assumption on this return (7% rental yield and 4.5% capital growth) then Sipho has R9 365 947 in his savings pot at retirement. His overall financial position is 10.8% worse off than if he had not made a deduction from his savings pot. His total pension is only 3.6% lower. This is because his retirement pot cannot be touched; it has been preserved. So from an overall financial point of view Sipho’s pension has dropped from R15 288 a month to R14 736 a month. However, he now owns his own home, which he may not have been able to afford has he not accessed his savings pot. Thus in the right circumstances it can be possible to access your savings pot without harming your future retirement income significantly.
The following table shows the above example but changed to allow for 0% tax on the savings pot withdrawal:
In this case the overall pension has dropped only 0.6%. Thus the biggest detractor from making the withdrawal from your savings pot is tax. Is this reasonable for a deduction such as buying your own house? Should the tax you pay be less if you are making a legitimate withdrawal?
Using your savings pot to buy a car
Now let’s look at an example of Sipho using his savings pot to buy a car. At 40 years old, Sipho decides to use his savings pot to buy a car. He withdraws R600 000. After tax this amounts to R400 000. This is equivalent to a car worth R125 000 in today’s money.
The following table shows the results of this decision:
His savings pot has dropped from R10 505 309 to R 5 707 922. He has lost 45.7% of his savings pot! He has given up on 12 cars at retirement because he decided to buy one car at age 60. Thus he has made a poor financial decision by using his savings pot to buy a car.
What have we learned?
The examples above show that the decision on how to use your savings pot can influence your future retirement position significantly. You can improve or destroy your future financial position. It is thus vital to consult a financial planner before you make a withdrawal from your savings pot. Employers and trustees can help members by making such financial planners available.
