South Africa’s retirement fund industry underwent significant changes this year, with the most notable being the implementation of the two-pot retirement system that took effect on 1 September 2024. While much of the discussion focused on what this system entails – what to do and what not to do – very few were addressing the root cause that led to its creation in the first place.
George Mahlakgane, Asset Protection Specialist at George Mahlakgane Financial Services and Consult by Momentum Flora Park Franchise Principal, unpacks how income protection could have prevented many South Africans from depleting their retirement funds both now and in the past.
What is the Two-Pot Retirement System?
The two-pot retirement system allows retirement fund members to make partial withdrawals before retirement while preserving a larger portion that can only be accessed upon retirement. This change aims to provide financial relief in times of need while ensuring that individuals still have sufficient savings for their later years.
How Did We Get Here?
The simple answer: the COVID-19 pandemic.
By 15 July 2020, reports indicated that at least three million South Africans had lost their jobs. By the end of the year, only R55.6 billion had been paid out through UIF to 1.1 million applicants since the first lockdown in March. Many South Africans struggled to keep up with essential living expenses due to retrenchments, as businesses downsized or shut down entirely.
This financial crisis led to a widespread trend of individuals cashing out their retirement savings just to survive. While emergency measures such as the two-pot system aim to ease future financial strain, the key question remains: could this have been avoided?
The Role of Income Protection in Financial Security
The answer lies in income protection insurance – a long-term insurance policy designed to replace or supplement your income should you become critically ill, disabled, or retrenched. Depending on the policy, employees can receive between 50% and 65% of their income, ensuring they can meet their financial obligations even when unable to work.
Many employees mistakenly assume their employer will continue paying them indefinitely in the event of illness or disability. In reality, most employers provide a salary for a limited period, after which employees rely on statutory sick pay – typically lasting around six months. If an employee is unable to return to work within a year, they are often let go, forcing them to dip into savings or retirement funds.
Income protection safeguards individuals in such situations, preventing missed debit orders, mortgage payments, and other essential expenses. In a crisis like the COVID-19 pandemic, having this coverage in place would have significantly reduced the number of people forced to cash in their retirement savings prematurely.
The Importance of Financial Planning
While income protection is an essential tool in financial resilience, it is equally important to seek professional financial advice. Policies come with varying waiting periods, which impact premiums – the longer the waiting period, the lower the cost. A financial advisor can guide individuals in selecting the right policy and, for those who opt out of income protection insurance, provide strategies to responsibly manage their retirement funds.
As South Africans prepare for the implementation of the two-pot system, it is crucial to make informed financial decisions. Income protection offers a safety net, ensuring that retirement funds remain intact for their intended purpose – retirement. The best way to avoid another financial pandemic is to plan ahead, protect your income, and seek expert advice to navigate life’s uncertainties.