Two-pot withdrawals: Where was the money spent?

You can also listen to this podcast on iono.fm here.

DUDU RAMELA: From the 1st of September 2024 to the 31st of January 2025, R43.4 billion in two-pot claims [was] processed … so, after tax, R32 billion was deposited into South African bank accounts. That’s according to the South African Revenue Service [Sars].

The Bureau of Market Research personal finance research division has done some analysis on where the money has been spent and what that tells us about South African consumer spending habits. Rob Southey is head of Asset Consulting at Momentum Corporate. He joins us on the line for more.

Thank you very much. Rob, for your time this evening. When you take a look at the overall findings, what was your key takeaway?

ROB SOUTHEY: Good evening and good evening to you listeners. I suppose the first one that everybody was looking out for was whether these withdrawals were being used to pay down debt.

Before this research article came out, the only information we had available to us was surveys.

When people completed the form to make a withdrawal they would be asked a question: ‘What are you going to do with the money?’ If you wanted to use it for a purpose other than paying down debt, you might not actually want to state that because it may not be the most sensible financial decision.

So up until the research came out, all we had was survey data. What the survey did do is it looked at different sources like Sars or the Reserve Bank. It looked at credit bureaus, it looked at NaTIS [National Administration Traffic Information System]. And then it gave us a good idea of where we had seen changes.

So we kind of had to attribute and say this is what we think is happening. We’re not 100% sure, but this is what it looks like. So I think the key thing that surprised me positively was the fact that people were using it to pay down debt – specifically things like your store cards, cellular contracts, education and things like that.

DUDU RAMELA: Used-car registrations surged to a decade high. What does that say about the balance between financial relief and new credit uptake?

ROB SOUTHEY: That’s an interesting one. Some of these things we’re going to have to wait and see through time if there are any patterns that evolve.

But I think what it does mean is that, firstly, if people before haven’t been able to fund a vehicle these payments obviously went down to put down payments on vehicles. So people were stretched.

The other thing that it does say, though, is that if you’re able to make a down payment, you believe that you’re going to be okay to pay a monthly instalment on a vehicle for whatever it is, three years or five years – or whatever the case is. So I think that’s positive.

The other thing is if people are putting money into things like a vehicle, it enables them to be more mobile and rely less on public transport, which I think is a good thing.

DUDU RAMELA: There’s been an absence of savings in this. Fair enough. When it was done, it was done in the name of relieving pressure on the hard-pressed consumer. But why do most two-pot funds get spent on survival and mobility rather than saving? What does it tell us about the average South African consumer?

ROB SOUTHEY: I think there are a couple of things in that. Firstly, I’m not at all surprised that when you look, people didn’t withdraw from their two-pot to save. That wouldn’t make any sense at all.

A retirement fund is a very, very efficient and cost effective way of saving, so you wouldn’t want to take it out of your retirement fund, pay the marginal tax on it, only to put it into a bank account or a unit trust or whatever. Your investment returns would have to be substantial to end up in the same place.

And the funding is still available if you want it for an emergency. So I think that what’s very clear here is that people who are withdrawing typically should be using it for emergencies.

The other thing that has been quite interesting post this research coming out is that after the 1st of March, people are able to make withdrawals again and the stats are very, very high, so things that we’re seeing after 1st March.

There was a research article that came out of the Actuarial Society, which says that about 75% of people withdrawing after the 1st of March had withdrawn already. And among our client base, we’ve seen things like 65%, we’ve even seen as high as sort of 88%. So I think that does show that people really want to access, and they want to access it frequently.

But the real the real crux I think is something we’re going to have to tell through time and the debt.

Repaying debt is a very interesting one because when you look at the major banks, the major banks are not saying people are paying down debt. So we think it’s the more informal lenders.

But the big question that we’re asking now is: Are people paying down debt to get out of debt, or is it just paid down so I can go back in?

That, through time, is going to be where we’re going to start getting a pattern and understanding what people are doing with their savings pot withdrawals.

DUDU RAMELA: So it has given you short-term breathing room. But in the long term, it raises some really important questions. What do you say to somebody who says, ‘Well, I’m young. Are you telling me to put my money in a retirement fund but I can take it out? So what? Think for tomorrow, today? Think for today tomorrow? What’s the point then?’

ROB SOUTHEY: Yes, I think that’s a good point. Across our client base, many people justifiably, if they’re under financial stress, [think] I’ve got this asset, all these many months money is sitting tied up in a retirement fund. I don’t need it in 10 or 15 or 20 years, I need it now. I need to pay school fees. I need to buy clothing; I need to pay transport.

So I think that this two-pot system does alleviate some of those pressures. The other difference that it makes is that the retirement component – you can’t touch that. So previously when you moved jobs you could access your whole retirement fund. Now you can’t. You can only access the third; the other two-thirds has to stay there.

So I think the principle is sound. There is an inflection point where the savings under the two-pot actually end up overtaking the savings that would have happened under the original regime. So the principle is fine.

It’s just how do we get people to understand the impact on the long term, and also how do we educate people to say is this the best bang for my buck? Are we being frivolous? Are we withdrawing because we can or because we really, really need to?

I think through time we’re going to start getting a better understanding of what people are doing. But also the education, I’m hoping, will work its way through and people will be as sensible as possible with that, with the funds that they can access.

DUDU RAMELA: You mention a very important word, education – because, well, throughout the years we’ve also heard about the lack of financial education or financial knowledge when it comes to us, generally South Africans, and so consumer education.

I know we still have a long way to go but from this research what can we glean in terms of consumer education? Are we making progress because this liquidity was predominantly for people to use? Well, people used it for immediate consumption, debt repayment and assets – not your car; I don’t know if you can classify it as an asset.

So are we seeing that? Are we getting some headway where financial education is concerned?

ROB SOUTHEY: So I do think the education around two-pot was significant and substantial. When you look at the surveys of people when they withdraw and they are asked, ‘Do you understand how this works, do you understand the process, et cetera?’ I think they do.

The one where people seem to be most taken aback is by the tax at marginal rate. I think people believed that it was unfair.

‘Why are you taxing me on this?’ And it was maybe a little bit of a blind spot. We often hear what we want to hear and ignore what we don’t.

So I think the education around two-pot has been very good. There is no doubt that education and financial literacy needs to improve substantially, and that’s whether through media, through formal sort of education, or through other means.

The other component which has come out – and there was another bit of research done by both Momentum and the Bureau for Market Research – is around the use of financial planners.

The report is hot off the press and we need to interrogate the statistics a little more.

But what it does seem to demonstrate is very, very clearly, those people who take advantage of financial advice end up growing wealth substantially more than those who don’t, those who rely on their – what, influencers? – or discussion around a braai.

And so I do think that over the next decade or so we probably would want to see a substantial uptake on the use of financial advisors. The stats came out saying that only 9% of households take financial advice from a professional. You increase that substantially; you see a substantial change in the way people manage money.

And the other thing which also came through from the survey, which was really an eye-opener for me, because I had a perception about this, is that financial advice is not only for the wealthy. I think that that’s a component of the industry that really needs to be expanded and explored substantially, because that’s really where we’re going to make a difference.

The legislation can go so far. Rules can go so far. Thereafter you need people to get an understanding and sensibly make decisions.

One of them is like budgeting. If people know how to budget, that solves a lot of problems. Many of us may not be that good at planning, but if we plan and we budget, it makes a substantial difference. And that’s a very simple thing to get going.

DUDU RAMELA: Yes. Just as a sidebar, I chuckled when you mentioned the word ‘influencers’. I hadn’t heard of that before.

But when you speak of households, and what we’re going through, according to a first-quarter debt index released by DebtBusters, households earning between R10 000 and R35 000, which are classified as the middle class in South Africa, are cutting back on essential spending, and that includes on their own children, vehicle loans, utilities, transport and food just to make it and to keep heads above water.

And so, when you are with a financial advisor, how do you save right when you are so squeezed that you have to drop some stuff – even for your own children?

ROB SOUTHEY: I think that’s where again I’m going to come back to budgeting. Where we budget we know where we’re spending our money. If you don’t budget, you don’t know.

So, for example – and I’m just going to pick something up – if you go and have a coffee every day, you go and buy a coffee on the way to work or whatever the case is, that all adds up.

You do that a couple of times a week and before you know it, [it’s a considerable sum]. I think the adverts from various providers say instead of buying the coffee, put that money into a collective investment scheme or something, and you’ll see a substantial difference.

I think it is quite different where you don’t even have the means to look after your own kids. Then I think it’s beyond a budgeting problem, because then you very likely just don’t have any disposable income available for anything else. And that’s maybe then a different problem.

But I do think – and I’m coming back to your point around education, how important that is – the need to get some kind of financial advice doesn’t have to be complex. It doesn’t have to be about product sales. It just needs to be: ‘Help me engage with my finances, help me understand.’

And that’s where retirement funds and retirement fund trustees really need to play more of a role. They are doing that. They’re significant.

Every retirement fund is required to have a benefit counsellor, but I think there’s a lot more the trustees can do in terms of engaging their members.

I mean this in a good way; it’s kind of a captive audience. If you’re an employer and you’ve got a workforce of 500, 2 000, 20, it doesn’t matter. Those are people that you can engage directly. They have already got benefits with you. They understand and they trust the retirement fund, things like funeral policies, things like group life.

So why not engage them around financial planning and financial education? I do think that that’s one of the other ways that one can make real inroads. That deals with kind of the formally employed. And I think for the informally employed we mustn’t forget that’s a little bit more complex; but we have to start somewhere.

DUDU RAMELA: Sure. Please expand on [that] – when you speak of the informal or, more so, some of the complexities.

ROB SOUTHEY: Well, the formal – let’s just take somebody who will many times a day see a taxi driver. The guys are earning an income, but how do they go and save in a retirement fund?

For [someone] employed with a company – a company sets up a retirement fund for them – [but] that’s not an option, so they need to go and save in a different way.

Stokvels are one of those ways and they’ve been very successful.

But through time, things like your collective investment schemes et cetera – you don’t need to have a lot of money to put into those on a monthly basis, but it does require a bit of an education, a bit of understanding.

If it’s not your world, and you don’t deal with finances, just to hand over [your money] to a collective investment scheme is quite a frightening thing. So how do we sensitise people to the fact that this is trustworthy, it makes sense?

The other fact is if you deal with investments and you put your, whether it’s R200 or whatever, into your collective investment scheme, and the market goes down, your R200 is now R150 or R180. You kind of you give up and say ‘What happened to my money?’

So there’s a lot more about this that that needs to be expanded and explained.

I do, however, think that the media is doing a very good job around helping people understand through time.

It’s kind of through osmosis. The more we tell people the message, the more comfortable they’ll get, and the more we enable them to ask questions and feel comfortable with that, people will then start dabbling and start looking and then go from there.

DUDU RAMELA: Thank you so much, Rob, for your time this evening. Rob Southey is head of Asset Consulting at Momentum Corporate.

Follow Moneyweb’s in-depth finance and business news on WhatsApp here.