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Opinion

Should the UK adopt South Africa’s ‘two-pot’ retirement savings system?

Inflation and the subsequent cost-of-living crisis have pushed millions of UK citizens to the brink of financial crisis.

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Should the UK adopt South Africa’s ‘two-pot’ retirement savings system?
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Inflation and the subsequent cost-of-living crisis have pushed millions of UK citizens to the brink of financial crisis. According to a report released by Debt for Justice in March this year, 6.7 million people across the UK are now in financial difficulty, with 13% of adults having missed three or more credit payments in the preceding six months. That rises to 29% among 18 to 24-year-olds and a quarter for 25 to 34-year-olds.

While debt and missed payments can be devastating at any age, they can be particularly so for young people. At a time when they should be building up wealth and equity, they instead find themselves struggling to make payments, damaging their credit scores, and even having household goods repossessed. All of those things can take years to recover, never mind the mental and physical toll it can take on a person.

Further evidence of how bad UK household debt has become can be found in figures released by PWC last year, which showed that UK household debt had topped £2tn for the first time. That put household debt nearly on par with the country’s £2.2tn GDP.

Households having that much debt comes with pitfalls for the economy too. As the Bank of England points out, households with high debt levels tend to spend less during and after a recession and also are more likely to default on their debts, resulting in losses for lenders.

With a mechanism in place that allows people access to money in times of emergency without having to go further into debt, many of those pitfalls could be avoided.

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But what might that mechanism look like? One option would be to take a leaf out of South Africa’s book and implement something similar to its so-called ‘two-pot’ retirement savings system.

Two-pot explained

The two-pot system, which came into effect on 1st September, was designed to give ordinary South Africans a means of getting through a financial crisis while still preserving at least some of their retirement savings.

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Effectively, the system splits retirement savings and investments into two pots – technically, it’s three pots, as any vested amounts are governed under existing fund rules but over time it will consolidate to two pots for most people.

Two-thirds of the money put into any retirement investment vehicle goes into a retirement pot, with the remainder going into a savings pot. Under certain emergency situations, South Africans will be able to withdraw from the savings pot, leaving the bulk of their retirement savings intact and accessible only once they reach retirement age.

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While the system will undoubtedly have a long-term impact on retirement savings, it’s an improvement on what, up until recently, was the status quo.

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In the past, many South Africans would cash-in all of their retirement savings in the event of a financial emergency. Those with employer-funded pensions would even go as far as resigning from their jobs to access their retirement savings.

Could it work in the UK?

There’s an argument to be made that it could work even better here than in an emerging economy like South Africa’s.

Part of that belief has to do with the fact that there are more protections in place for most UK citizens. Take state pensions for example. With high employment levels, the National Insurance contributions made by working citizens during their career, mean that state pensions go further.

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While every pensioner in South Africa receives the same, small monthly amount – approximately £94 – UK state pensions average out to around £221 a week.

There is also a much greater uptake in workplace pension schemes. Since 2012, most UK workers aged between 22 and State Pension age have been automatically enrolled into workplace pensions.

As a result, more than 80% of UK workers participate in such schemes. By comparison, just 23% of working age South Africans are covered by the country’s retirement fund industry.

The greater UK uptake means that people are more likely to have some kind of pension saving, no matter where they work. A South African leaving their job and withdrawing their retirement savings doesn’t have anywhere near the same certainty that there’ll be a workplace pension scheme at their next job.

For emergency use only

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Despite the potential benefits of the UK adopting the two-pot retirement system, there are caveats. High among them is the fact that withdrawing from one’s retirement savings damages the ability of compound interest to work its magic. So, once the financial emergency is over, the withdrawer would have to save even more just to get back to where they would have been otherwise.

Given that the number of UK residents failing to save enough for retirement is already rising and the population is aging, that’s something the country can ill-afford.

So, should the UK choose to take a leaf out of South Africa’s book, it’s critical that Government and industry alike emphasise that the money made available through the system should only be used in absolute emergencies.

That said, using your own money to get out of a financial crisis is better than borrowing to do so, especially as high interest rates make debt more expensive than it’s been for the best part of two decades.

Tobie van Heerden is CEO at 10X Investments

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