Two-pot savings are a tool for financial freedom, not a quick fix

Industry experts weigh in on why South Africans should leverage the two-pot savings system alongside short-term insurance as tools to achieve long-term financial goals.

By Mark Sanders, COO of GIB Insurance Brokers, and Glenn Gamsy, MD of GIB Financial Services.

Many South Africans consider the recent implementation of the two-pot retirement system in South Africa a gift from above, offering much-needed relief amid the widespread financial uncertainty, the high cost of living and mounting debt in South Africa. At the same time, there has been growing concern from insurance providers and financial institutions about how this will impact consumers’ short- and long-term financial decision-making.

Industry expert Mark Sanders, COO of GIB Insurance Brokers says that now more than ever, consumers must take a strategic approach to their financial planning, particularly when it comes to insurance.

“Since the implementation of the two-pot solution in September this year, financial services providers have already received claims totalling over R21 billion. While it’s understandable that many consumers are prioritising short-term financial pressures, this can lead to decisions that may compromise their long-term financial security,” says Glenn Gamsy.

Sanders notes “using two-pot savings as a fallback for emergencies may seem practical and attractive in the short run, he adds, but warns that using retirement funds to address short-term problems, like replacing damaged assets or covering debts, may be damaging to the stability of consumers’ financial futures.”

“Consumers must be wary of using their two-pot savings for costs that can easily be covered through conventional insurance products,” Sanders explains. “Short-term insurance is designed specifically to provide immediate protection without touching your long-term savings. This ensures that your retirement funds are preserved for their intended purpose – your financial security in retirement.”

Gamsy adds that the uncertain economic climate many South Africans are facing is even more reason for consumers to think more carefully before making hasty withdrawals. “The two-pot system should not be seen as a substitute for insurance. Rather, it serves as an additional safety net for unforeseen emergencies. Tapping into retirement savings prematurely could compromise your financial future,” he says.

Sanders adds that consumers need to view insurance not as an optional add-on but as an integral part of a comprehensive financial strategy. “Short-term insurance products protect you from having to dip into your savings for asset loss or damage. This is crucial because premature withdrawal from your retirement savings has both immediate tax implications and long-term effects on your retirement plan.”

Balancing short-term insurance with long-term planning

Many South Africans, across income levels, have traditionally focused on short-term financial needs, such as paying premiums, covering bills and protecting immediate assets. However, with the introduction of the two-pot system, there’s an opportunity to shift this mindset toward more balanced financial planning.

Sanders explains, “Insurance should be part of a broader financial plan that includes both short- and long-term strategies. It’s important for consumers to continue using short-term insurance for asset protection and to reserve the two-pot funds for true emergencies that cannot be covered by conventional means.

“Thinking of two-pot savings as an alternative to insurance could also lead to underinsurance or even a complete disregard for the insurance products available to them,” he says.

Sanders says that South Africans should be using both short-term and long-term financial products in tandem with the two-pot system. “Short-term insurance is your first line of defence, while your two-pot savings should be reserved for emergencies that cannot be insured. It’s crucial for consumers to maintain a long-term view of financial security.”

The two-pot system presents a unique opportunity to shift consumer attitudes towards financial planning. “We’ve noticed a trend where consumers are becoming more focused on product value rather than simply opting for the cheapest options,” Gamsy notes. “With the introduction of the two-pot system, there’s an opportunity for even greater awareness about long-term planning and the importance of protecting assets without compromising retirement funds.”

Both Sanders and Gamsy assert that educating the consumer market about these potential risks is vital. As Sanders emphasises, “It’s incumbent upon brokers and advisers to inform consumers about the long-term implications of withdrawing from their two-pot savings for short-term needs. Insurance is there to prevent exactly that.”

“The two-pot system shouldn’t be seen as an immediate fix for today’s problems,” concludes Gamsy. “Instead, it’s a tool to enhance financial security, and it should work hand-in-hand with appropriate insurance products to create a robust, holistic financial plan.”

Consumers are encouraged to engage with professional advisers, such as those at GIB, to ensure their financial decisions today won’t compromise their security tomorrow.