Car expenses eating up retirement savings in South Africa

South African consumers are dipping into their retirement funds early to cover car expenses, a new report by Discovery has revealed.

South Africa’s new “two-pot retirement system” was introduced in September and separates citizens’ retirement savings into two proverbial pots – a “savings” pot that accounts for one-third of the money with the rest assigned to a “retirement” pot.

The thinking behind this system is that people can now access the savings pot before their retirement in the event of an emergency.

While the idea was celebrated by cash-strapped consumers, experts warned that it is likely to lead to short-term gains in the economy, but long-term pain.

In September, the National Automobile Dealers’ Association (Nada) predicted that the new two-pot retirement system could add anywhere from R10 billion to R100 billion to the economy if early predictions are accurate.

“It will be interesting to see how many people take advantage of the opportunity to access their savings within the prescribed limits,” said Brandon Cohen, National Chairperson of Nada.

“The two-pot system withdrawals might offer a temporary boost to the economy but could be detrimental in terms of long-term worker security.”

Cost-of-living conundrum

In Discovery’s latest survey, it found that car and home expenses are the two main reasons for consumers withdrawing from their savings pot.

Approximately 24% of survey respondents said they were taking out money to service home and car costs, followed by a need to pay off short-term debt at 21%, education at 20%, and day-to-day expenses at 11%.

“Sadly, these are all indications of the cost-of-living crisis faced by so many,” said Guy Chennells, Chief Commercial Officer at Discovery Corporate and Employee Benefits.

Another often-stated reason was home improvements and renovations.

“This isn’t really recommended as a good use of two-pot savings because it does not truly classify as ‘emergency spending’,” said Chennells.

“It’s still understandable, though, because South Africans who want to improve their lives are simply unable to create discretionary spending from their regular income at the moment.”

Travel was only selected as a reason for withdrawal by 1% of claimants, indicating a decent level of financial literacy in most consumers.

Discovery further notes that individuals aged between 35 and 45 accounted for the most withdrawals from their accumulated retirement savings.

“This figure emphasises the pressures facing South Africa’s ‘sandwich generation’, who are battling to support young children while potentially being responsible for their older parents, too,” said Chennells.

“This is worsened by the recent high-inflation cycle, increased debt and electricity costs, and other cost-of-living pressures which have devastated household finances, especially for families.”

Age played a small role, however, as income was a much stronger driver of withdrawal rates.

Approximately 38% of low-income Discovery clients claimed from their savings, falling to 29% for the middle-income group, 12% for high-income individuals, and 4% for very high-income consumers.

Chennells highlights that withdrawals were highly affected by whether a certain person was qualified to dip into their savings, which many were not.

“If there was less than R2,000 in their savings account from the seeding, claimants were not allowed to withdraw; and if claimants are in the over-55 age category, they must physically opt in to the two-pot regime before 1 September 2025 for their seeding to occur,” said Chennells.

Therefore, by income, only 34% of low-income earners were eligible to get their money.

“As this is the group with the highest claiming rate, withdrawals overall would have been much higher without the R2,000 minimum requirement,” said Chennells.

“It also means that withdrawals are expected to rise by the end of the year as savings components grow with contributions and investment returns.”

Of the middle-income group, 67% qualified, while 83% of the high-income group and 90% of the very high-income group qualified.

“So far, two-pot withdrawals have been lower than our team expected, and we hope that some of this is due to people changing their minds about dipping into their retirement savings,” said Chennells.

“Understanding other options for short-term capital, or how much more you will have to contribute to your fund later if you withdraw, or how much you will lose to tax, has proved critical in helping people make the right decisions.”

Discovery anticipates another spike in withdrawals in November during Black Friday, possibly another at Christmas, and a third early next year as the new school year starts.

“However, the relatively low percentage of overall withdrawals shows that most people understand they must only draw on their savings pots in genuine financial emergencies,” concludes Chennells.

“They realise that the more disciplined you are about not withdrawing, the more you will have available if one day you really do need it.”