The importance of an emergency fund in the two-pot era

For a long time, the retirement savings industry has observed how many South Africans have struggled to balance accumulating and preserving their long-term retirement savings with the need for access to funds in difficult times. In too many cases, members of retirement funds have resorted to resigning from their jobs as a desperate measure to access their pension and provident funds; many others have opted not to preserve their retirement savings when changing jobs. The unfortunate consequence has been a burgeoning number of South Africans with insufficient retirement savings. Tebogo Marite discusses why building up an emergency fund should be prioritised even though the new two-pot retirement system allows some access to retirement savings.

The two-pot retirement system, which will go live on 1 September 2024, aims to combat both immediate and long-term hardship by allowing limited access to retirement funds, while enforcing preservation, with the aim of improving retirement outcomes. As shown in the graphic below, from the implementation date, all new contributions to retirement funds will be split into two components: One-third will be allocated to a savings component, which members can access once a year before retirement, and the remaining two-thirds will be allocated to a retirement component, which will be inaccessible before a member retires, and at retirement must be used to purchase a retirement income product. Existing retirement savings will go into a vested component and the existing rules will continue to apply. (For more detail, see Shaun Duddy's piece, which discusses how the new rules aim to improve outcomes and the risks that need to be avoided to achieve this, and Lydia Fourie’s article, which addresses frequently asked questions.)

By … making a concerted effort to build up emergency reserves … you can preserve your long-term investments for their intended purpose..

Read full article on: https://www.allangray.co.za/latest-insights/retirement/the-importance-of-an-emergency-fund-in-the-two-pot-era/

August 09 2024 By Tebogo Marite - Allan Gray