The Two-Pot Retirement System is designed to give you more control over your hard-earned pension fund. The flexibility of the two-pot system might seem attractive, but there are other factors to consider before you access your savings early.
In this blog we will explain the risks of early withdrawal from your savings pot, and share the opinions of Neil Roets, CEO of Debt Rescue, as well as COO, Annaline van der Poel regarding this.
We want you to make well-informed decisions about your retirement.
The Two Pot Tier Splits your Retirement Savings into Two New Parts
- The Retirement Pot: This portion of your retirement savings stays unavailable until you reach retirement age.
- The Savings Pot: You will be able to access a third of your pension fund savings before you reach retirement age. Although it is important to keep in mind that withdrawing money from your fund could mean less money available when you retire.
What are the Consequences of Early Withdrawal?
Reduces your Investment
Taking money out of your savings pot might offer immediate financial relief, but it will reduce the amount you have invested. Your retirement fund growth relies on compound interest, and withdrawing funds can leave you with significantly less money during your retirement years.
Be cautious of the Tax Implications
CEO of Debt Rescue, Neil Roets warns about the tax implications linked to the Two Pot system. Accessing your funds can provide short term relief, but the tax implications could be much bigger than you expected. It all depends on how much you withdraw and your overall income. You might find yourself in a higher tax bracket, increasing your tax bill.
In an article published by The Citizen, Roets said,“Being taxed at the tax bracket rates, which will apply to withdrawals, is very different from how cash lump sums are currently taxed at retirement and consumers should consider the implications before any withdrawals are made.”
“In addition, withdrawals from the savings pot will be taxed at the marginal rate, which is significantly higher than the existing tax rate applicable to early retirement fund withdrawals,” Roets added.
You can read the article here.
Before you Take Funds out of your Savings Pot…
Before you make any decisions of withdrawing from your pension fund, here are a few options to consider.
- Your financial Needs: Ask yourself if this withdrawal is absolutely necessary. Try to find other ways to manage your finances without taking money out of your retirement savings.
- Planning for your Future: It might be worth speaking to a financial advisor to explore all your available options. This will help you to understand how withdrawing funds out your retirement pot might affect you at a later stage.
- Consider the Tax Implications: Find out what tax bracket you will fall under before you make a withdrawal.
Advice From the COO of Debt Rescue, Annaline van der Poel
For a clearer understanding of the Two-Pot Tier System and how it might affect your retirement, we highly recommend you to listen to Annaline van der Poel’s interview on OFM.
In this interview, Annaline explains the key considerations when it comes to early access to retirement funds, highlighting both the potential benefits and the risks involved. She also explains the impact of compound interest and why it’s so crucial to protect your retirement savings from premature withdrawals.
If you’re thinking about dipping into your Savings Pot, this interview provides essential guidance to help you make the best choice for your future.
Our Final Thoughts: Protect your Retirement Future
Before making any decisions about withdrawing from your savings pot, take the time to consider all the aspects. Assess your immediate financial needs, what the long term impact could be, and be fully aware of the tax implications.
By protecting your retirement savings, you will reap the benefits during your retirement.
How can Debt Rescue help you?
Debt Rescue can help you by:
- By Providing a free, no-obligation debt assessment: Our experts will analyse your financial situation to determine the best course of action.
- By Consolidating and reducing your monthly repayments: We’ll work with your creditors to negotiate lower payments, making it easier to manage your debt.
- By Offering personalised financial advice: Our debt counsellors can provide guidance on budgeting, debt management strategies, and other financial matters.
