The two-pot retirement system gives South Africans the opportunity to withdraw a portion of their retirement savings before they actually retire and, for many, this lump sum offers a financial lifeline. In fact, the SA Revenue Service (SARS) reports that it received 2,664,279 applications for two-pot withdrawals within five months of the system being implemented in September 2024, resulting in a staggering R43.42 billion having been withdrawn.

However, Stian de Witt, Head of Financial Planning at financial advisory firm NMG Benefits, cautions that a two-pot withdrawal must be considered from several perspectives before being accepted as a solution for short-term financial challenges.

The first consideration is that such withdrawals are taxed – and the applicable tax rate may be much higher than you think. Two-pot withdrawals are taxed on your marginal rate, which is the rate relevant to the last rand you earned and is often much higher than your ‘average’ tax rate. But, if you wait until retirement before withdrawing, a portion of this withdrawal will be tax-free. “Taking money out of your retirement savings early not only incurs steep tax, but it also means that you are reducing the amount that you could potentially withdraw tax-free if you wait.”

Another important consideration is that your retirement savings are there to support you when are considered too old to earn an income, and tapping into them now will reduce the amount available to carry you through your retirement years. An early withdrawal will immediately erode the capital amount available for your retirement and, because you will also start losing out on compound interest, the long-term effects will be significant.

The implications could entail having to downscale your lifestyle, become financially dependent on others, or rely on social grants.

While there are risks attached to early withdrawals, De Witt acknowledges that accessing some of your retirement savings might be a sensible, viable option if you are facing a medical emergency, job loss, eviction, loss of assets or legal trouble, or if you have excessive, high-interest debt.

But the best way to avoid dealing with the long-term consequences of withdrawing from your retirement fund early is to proactively strengthen your short-term financial security. De Witt’s advice is to partner with a financial adviser who can help you to budget and plan properly. Start by spending less than you earn and saving every month for an emergency fund that can cover three to six months’ worth of expenses. You should also avoid taking on unnecessary interest-bearing debt; it’s one thing to take a bond on your house, but another thing entirely to buy luxuries on credit cards.

“Withdrawing savings under the two-pot system should be a last resort, not a default option. Remember that retirement is a marathon, not a sprint, and so you should focus on ensuring that you have enough at the finish line instead of using up your fuel too soon.”