The Savings Pot or savings component of the Two-Pot Retirement System is designed to be your cash lump sum at retirement. If you would like to understand the different pots better please read this article first. Withdrawing from the savings component before retirement will significantly impact your retirement outcome.

You will pay tax and fees: The money you withdraw from the savings component will be added to your taxable income and taxed at your marginal tax rate – as high as 45% for top earners. If you owe taxes to SARS, SARS will issue a directive to deduct the amount it is owed, and only the remaining balance will be paid to you. You will also pay an administrative fee if you withdraw from this component.

You will have less retirement income: Any amount you withdraw will reduce your income at retirement. Avoid withdrawing unless you are sure you have more than enough to fund your retirement. Withdrawals will have a compounding impact over time and should be a last resort for a real financial emergency.

Here is an example of how drawing from your savings components can impact your retirement savings:

• You and your partner, both 30, start saving for retirement and contribute R1 000 per month, with an underlying portfolio growing at 10% a year.
• You withdraw 10% every tax year, while your partner leaves their investment to grow.
• After 25 years, you will have R252 761 saved, and your partner will have R1 243 160 – more than 4.9 times your amount. You also paid tax and fees on every withdrawal, further reducing the cash that ends up in your pocket.

Assumptions: Yearly Investment return – 10%, monthly investment return – 0.7974%, monthly contributions made at the start of every month – R1 000 (adviser fees excluded), savings term – 25 years.

You will have less cash at retirement: If you withdraw from your savings before retirement, you will only have a retirement income benefit and no lump sum benefit.

So, rather prepare for emergencies and unexpected expenses by saving for them separately instead of using your retirement savings. Having savings in another account or investment can help you face financial challenges and keep all your retirement savings for your future self.

What is a financial emergency?

The legislation doesn’t specify the circumstances that would qualify as a financial emergency. The definition will differ for each person. However, it is important to ensure that you have some savings aside, over and above your retirement savings, for unforeseen expenses. Withdrawals from the savings component should be infrequent as this is your retirement savings.

Consider withdrawals carefully and speak to a financial adviser who can help you navigate difficult times. You might have other options available that you haven’t considered.

A financial emergency is an unforeseen event that requires immediate funds that can’t be covered by your regular income or savings. Examples include:

• Unforeseen medical expenses: such as surgeries, hospital stays, or treatments for serious illnesses or injuries.
• Urgent home repairs: critical repairs needed to maintain the safety and habitability of a home, such as fixing a damaged roof.
• Job loss: financial support needed during periods of unemployment, covering essential living expenses such as rent or mortgage payments, utilities, and groceries while seeking new employment.
• Major vehicle repairs: necessary repairs to a primary vehicle required for commuting to work or other essential activities, where the cost exceeds what can be covered by regular savings.
• Natural disasters: expenses due to natural disasters such as floods, including temporary housing, repairs, and replacement of essential belongings.
• Legal fees: legal costs arising from unexpected events such as a lawsuit, divorce, or other significant legal matters that require immediate attention and payment.

What counts as a financial emergency depends on individual situations. For example, while a holiday is usually not a financial emergency, there are special cases where it might be. Imagine a mother with a terminal illness; a holiday could be her last chance to spend quality time with her family. In such cases, the emotional importance makes it a unique emergency. This shows the need to consider personal situations when deciding when to withdraw from the savings component. Each person's circumstances and priorities matter, emphasising the importance of flexibility and empathy in financial advice and planning.

Speak to your financial adviser to review your financial situation before you make any decisions that will impact your retirement savings.