Gus van der Spek
owner Wytham Estate
While much has been discussed about the effects of South Africa’s newly introduced two-pot retirement system on the general population, little has been focused on how these new regulations will affect the country’s current and upcoming pool of high-net-worth retirees.
Implemented on 01 September, Gus van der Spek, owner of upmarket retirement lifestyle development Wytham Estate in Cape Town’s Southern Suburbs, shares that the new system will have a significant impact on high-net-worth retirees – South Africa’s top 6% who can afford to retire comfortably (10X Investments Retirement Reality Report 2023).
“The two-pot retirement system was designed to discourage contributors from the early withdrawal of pensions by resignation or voluntary retrenchment to preserve funds for retirement,” he says. “The bulk of contributions are withheld until retirement but pension fund savers will now have access to a smaller pot of funds in case of emergency.”
van der Spek adds that while the switch to the two-pot system will automatically be processed for all pension and provident funders, there is an exclusion for those who were older than 55 on 01 March 2021.
“This is good news for South Africa’s current pool wealthy retirees who have the opportunity to opt in to the new system if they wish to do so. However, for those who were below age 55 in 2021 and are planning to retire early or in the near future, the implications should be highlighted and considered.”
Three key implications of the two-pot system on high-net-worth retirees
van der Spek unpacks the three key implications as follows:
Improved retirement security – but only at retirement age
As per the goal of the two-pot system, high net worth retirees will also benefit from the retirement pot, seeing the bulk of their contributions reserved for retirement. This provides them with the opportunity to maintain their lifestyle through their retirement years.
The possible limitation, however, is for those wanting to retire early. “The two-pot system might prove restrictive for this group as funds are preserved until retirement age. Therefore, those wanting to retire early will need to consider alternative funding sources.”
Reduced access to immediate funds and better financial planning
High-net-worth retirees may need to turn to other sources of finances to maintain their lifestyle in the short-term.
“While the savings pot provides limited withdrawals prior to retirement, some retirees may need to revisit their financial strategies to tap into liquid assets that make allowances for big purchases such as luxury retirement properties, vacations or vehicles.”
The impact on estate planning
“Retirees will need to consider alternative avenues for wealth transfer, dipping into trusts and other investments for estate planning. This will see them adapting their financial strategies to accommodate the new two-pot system for better long-term planning.”
How wealthy are South Africa’s high-net-worth retirees?
“South Africa is in fact home to many high-net-worth individuals,” says van der Spek. “In terms of dollar millionaires, centi-millionaires and billionaires, Johannesburg and Cape Town top the list of cities that the wealthy call home in Africa.”
The Africa Wealth Report 2024 reported that with 37 400 dollar millionaires, 102 centi-millionaires and five billionaires, South Africa had the highest number of high-net-worth individuals in Africa at end December 2023.
He adds that with this in mind, it’s clear to see that the top 6% of South African retirees can retire comfortably without sacrificing their standard of living. “While the preservation of funds and financial stability during retirement may be less of a concern to some, they still deem access to funds, the management of funds and real estate planning as high priority items.”
Looking ahead
Looking ahead, van der Spek shares that, “In the short-term, the introduction of the two-pot system as well as the probability of interest rate cuts, is expected to boost consumer confidence and drive an increase in spending in the coming months.”
“In the long-term, retirement savings have a substantial impact to the economy, because higher rates of saving drive economic growth,” he adds, pointing to international success stories that show a notable shift in countries that have evolved from poor to wealthy have used savings and investment to do so.
“South Africa just needs to look at the impact of similar compulsory pension schemes in countries like Australia and Singapore (Adrian Seville, The Conversation).”
Australia’s Superannuation Guarantee scheme, which sees all employees over the age of 18 contributing a minimum of 10.5% to the scheme has accumulated to a total asset number of AUD $3.5 trillion – twice the size of Australia’s economy. Singapore’s Central Provident Fund is more than a retirement fund, incorporating healthcare and housing needs through different stages of financial needs.
“High-net-worth retirees may need to readjust their financial planning to suit their short-term needs, but we could see this wealthier market segment enjoying a luxurious retirement once they access their substantially higher value retirement pot which is good news for the luxury retirement property sector,” he concludes.