It’s often said that the government doesn’t care for its people. One might be tempted to agree when you look at the countless examples of bureaucratic bungling people have to grin and bear it.
But as a seasoned journalist of more than 20 years, I can tell you that things are seldom as black and white as they seem. Having cut my teeth in the courtrooms, poring over legal jargon, and digging through the fine print, one can tell when people have run out of ideas or when they are hatching up a sinister scheme.
Now, I’m not claiming to be a financial guru; far from it; but I am pretty good at reading between the lines, and when I first heard about the latest hot topic in SA today: the two-pot system, I started asking myself some tough questions.
What would I do with the money if I had been working for an employer since my 20s? What if my pension was sitting pretty in the millions?
And more importantly, how could I use this new system to my advantage without ending up on an episode of I Blew It?
Let’s break it down. From today (September 1, 2024), workers will have the right to access a portion of their pension funds before retirement without the need to resign from their jobs.
This new regime, known as the two-pot system, has sparked a lot of debate. Some pundits are up in arms, fearing that people will squander their hard-earned savings and face a life of poverty in old age. Others, like the South African Federation of Trade Unions, are of the view that the fine print is demoralising for workers who need to get rid of debt and get to enjoy their money before they retire.
It’s a legitimate concern. Let’s take a step back and look at what Bra Hulumeni (the government) is doing. The system allows workers to withdraw a third of their pension savings before retirement. Yet, the government has imposed a dizzying cap of R30 000 a year on these withdrawals, which seems more like a cruel joke than a lifeline.
I can’t help but see this as a missed opportunity. R30 000 is hardly enough to make a meaningful impact on anyone’s financial situation, especially in an economy where living costs are skyrocketing.
What the government should have done is allow workers to withdraw large sums but with the strict stipulation that these funds be invested wisely, such as in Retail Government Bonds (RGBs). This would have provided workers with a steady, additional income stream while keeping their long-term financial security intact.
Here is what the two-pot system looked like in my dreams before the devastating R30 000 cap was imposed.
Imagine this: you’ve been toiling away for 20 years. Your pension is sitting at R3-million. With the new system, you can withdraw R1-million, a third of your total, and still have R2-million waiting for you at retirement. But what do you do with that R1-million?
If you’re smart about it, you could use that money to give yourself a nice little pay raise. Instead of blowing your pension on a new car or paying off debts, you could consider investing in RGBs. These bonds offer a fixed return on investment over a set period. Here’s the deal:
- Option 1: Invest in a RGB for two years and get an annual return of 9.75%.
- Option 2: Invest in a RGB for three years and earn 10.50% annually.
- Option 3: Invest in a RGB for five years and enjoy an 11.75% annual return.
Let’s say you go for option 3 and invest your R1-million. That’s an additional R117 500 in your pocket each year. But here’s where it gets interesting: instead of waiting for that lump sum, you can opt to receive your interest payments monthly. That’s R9 750 extra every month, on top of your regular salary.
And if you think R9 750 doesn’t sound like much, consider this: how many people do you know who earn an extra R9 750 a month without doing extra work?
That’s what I call a savvy move. It’s like finding an extra gear in your salary engine – no union negotiations, no toyi-toying, just good old-fashioned financial sense. But what if you don’t have a million rand to invest? That’s okay too. Whether you have R300 000 or R500 000, the principle stays the same. A wise investment is equal to a pay raise. Even a modest R300 000 investment in option 3 would yield an extra R2 562.50 per month. It might not sound like much, but every little bit counts, especially when you consider that your principal pension remains untouched. You can keep reinvesting that money, year after year, until you retire.
As stated earlier, this is how I fancied spending my imaginary R1-million from the two-pot system. That was until the government, speaking from the high towers of “We care so much about you we are willing to give you R30 000 of your own money and still tax the hell out of it.”
Unfortunately, Bra Hulumeni’s restrictive approach has effectively killed the potential the two-pot system carried as a financial liberation tool.
Instead of empowering workers to increase their salaries through smart investments, the system traps them in a vicious cycle of indebtedness.
The confusion doesn’t stop there; the financial experts themselves are uncertain about the minimum R2 000 pot without any defined maximum. This lack of clarity only adds to the sense that the system is an exercise in bureaucratic overreach.
What the government has missed is a chance to show that it truly cares about its people. By setting such a low withdrawal limit, it has not only limited the benefits of the two-pot system but also failed to provide a viable way for workers to improve their financial situation.
- DISCLAIMER: The author of this article is not a licensed financial adviser and does not provide financial advice. The views in this article should not be considered as professional financial guidance.
