Savvy alternatives to employee two-pot withdrawals

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Our Sanlam Benchmark 2024 research, Accelerating A Better Working South Africa, shows the number of individuals planning to ‘cash out’ funds from their two-pot savings component has jumped significantly, from 31% in 2022 to 59% in 2024.

These findings highlight how people are under financial pressure and struggling to make it to month-end. However, it's imperative that individuals carefully consider accessing their retirement funding only for extreme and urgent financial needs and make informed decisions to preserve their savings when possible.

The importance of prudent saving

Our Benchmark research revealed that 50% of individuals had opted to cash in all their retirement funds when changing jobs in 2024 – a stark increase from 37% in 2023. Most respondents (33%) used their funds to cover their living expenses in 2024, with 21% either servicing, reducing or settling their debt.

The primary need for additional funding appears to be day-to-day living expenses and debt management. Just under 30% of respondents used it for other purposes, like travelling, starting a business, or assisting family members.

While the two-pot system offers flexibility, educating employees about the long-term implications of early withdrawals can guide them towards alternatives.

These alternatives can help provide financial relief without compromising people’s retirement security, including:

• Holistic financial-wellness programmes: Our 2022 Benchmark research showed that 29% of employees desire holistic financial-wellness programmes.

  By implementing these initiatives, employers can provide valuable tools and resources to help the workforce manage their finances without dipping into retirement savings.

  These programmes can include financial-education workshops, one-on-one financial coaching, budgeting tools, and resources for emergency savings to help reduce the temptation to access retirement funds prematurely.

• Debt-management strategies: Encouraging employees to explore debt-management options before considering accessing retirement funds. Our study reveals that 72% of respondents prioritise making debt payments on time, while 50% attempt to pay off debt before saving. Employers could consider offering workshops or resources on debt consolidation and how to negotiate with creditors for better terms.
• Pension-backed home loans: Inform employees about pension-backed home loans as an attractive alternative for those needing funds for property. These loans allow them to leverage their retirement savings as a guarantee for a loan, usually for buying a house or property, without reducing their funds.

  Their retirement savings remain intact and continue to grow with contributions. This alternative has the added advantage of being able to negotiate more favourable interest rates, when paying back your loan.

• Rewards and loyalty programmes: Educate employees about the power of rewards programmes. Our research shows that 80% of consumers have changed their shopping behaviour to leverage loyalty benefits. Consider negotiating corporate deals with rewards programmes to help employees reduce their need to access retirement funds.
• Employer-provided tools and benefits: Offer tools that allow employees to restructure their packages, potentially freeing additional funds. Also, consider providing access to financial planning services, debt counsellors, and budgeting tools.

  Our findings, in the 2022 Benchmark study, revealed that 32% of employees express interest in accessing financial planning and benefit counsellors through their employer.

• Financial advice and education: Our study shows that 47% of individuals don’t seek professional financial advice. Consider partnering with qualified financial advisers to offer employees personalised strategies to navigate financial challenges without compromising their long-term goals. Sanlam in addition to financial advisers, offers multi-channel retirement-benefits counselling, through WhatsApp consultations, calls, and group sessions.

Building financial confidence

Ultimately, the goal is to build financial confidence among retirement-fund members. Three factors that came out from our 2024 study defines financial confidence through:

• Being debt-free
• Having little or no financial stress
• Retiring with confidence

Empowering employees to explore alternatives to accessing the savings pot allows them to work towards these goals without compromising their retirement security. As we navigate the new retirement system, it's crucial to approach it with a balanced perspective. While it offers increased flexibility, it shouldn't become employees’ go-to solution for every financial challenge.

While the two-pot system is a tool, it is not a cure-all remedy. By providing resources for exploring alternatives, offering access to professional advice, and leveraging other available tools, more South Africans can make informed decisions that balance short-term needs with long-term financial security so they can retire with confidence.