Alarm bells ring as Sanlam reports high withdrawal claims among vulnerable members

In the inaugural month of the launch of the two-retirement pot system, data from Sanlam highlights a concerning trend: most withdrawal requests originate from individuals who are least equipped to withstand the repercussions of tapping into their savings component.

At the Institute of Retirement Funds Africa conference last week, Oletilwe Ramashala, the head of business development and strategic partnerships at Sanlam Corporate, shared Sanlam’s experience since the implementation of the two-pot system.

By 30 September, Sanlam had received more than 83 000 withdrawal claims, which translated into a value of R1.6 billion.

Ramashala said this period marked unprecedented engagement between members and their retirement benefits. Before 1 September, Sanlam typically processed between 7 000 and 8 000 claims a month. Of the claims submitted, 98% were done electronically. However, she added that the high rate of electronic submissions also raised cybersecurity concerns.

“How we’ve gone about mitigating that in Sanlam is that we only pay into the bank account in which the salary is being deposited.”

Most claimants were between the ages of 35 and 44, with average salaries ranging from R15 000 to R40 000. The average claim was R19 000.

Members in the financial industry led in the number of claims submitted, followed by manufacturing and other goods, and retail (non-food).

In terms of gender, 57% of claimants were men, while 43% were women.

On the tax front, Ramashala said Sanlam submitted more than 79 000 withdrawal requests to the South African Revenue Service (SARS) , with 78 000 processed successfully. Two percent of claims were rejected because of incorrect information. Of the claims, 86% were processed.

Sanlam observed an average tax rate of 20%. Among claims paid, 8 200 members did receive some form of money from the withdrawal, but at a reduced rate because they had to settle some taxes.

Meanwhile, 971 claimants received no payout at all, because their withdrawals were fully absorbed by outstanding tax obligations.

“It’s very important that members take stock of their tax status before they get tempted to withdraw,” she said.

Think twice before withdrawing

Danie van Zyl, the head of the Smooth Bonus Centre of Excellence at Sanlam Corporate, highlighted a troubling trend in the data, noting that most withdrawal claims came from members aged 35 to 44.

“So, it is not young members in their 20s. It’s someone slightly older who has kids and has debt that they need to sort out,” he said.

Van Zyl further noted that most of these members have a replacement ratio below 50% and are not necessarily high-income earners.

The replacement ratio represents the percentage of a member’s final salary that will be converted into their first pension payment upon retirement. Essentially, it indicates how much of their pre-retirement income will continue to support them in retirement.

For example, if a member’s last salary is R20 000 a month and their replacement ratio is 50%, they can expect to receive R10 000 each month in retirement.

The target level of retirement income for an average fund member differs across retirement funds. According to the Sanlam Benchmark 2024 survey, most funds target a net replacement ratio of between 70% and 75% of pensionable salary.

Van Zyl’s concern is that members who fall in the older age groups and make withdrawals have limited time to recover their retirement savings, particularly if their replacement ratio is below 50%

“They already don’t have enough money in their fund when they’re going to get to retirement. And now these are the members who are mostly withdrawing money as well out of two pots. It’s something we just need to be cognisant of and keep on tracking over time to see how that experience comes out,” he said.

Savings pot – for emergencies only

Van Zyl said that if members do not dip into their savings component regularly, it can grow to a significant amount of money.

“Which is the whole point, it is for emergencies, when you actually do need it.”

He said the average claim amount in September was between R20 000 and R19 000 because most members had less than R30 000 in their savings component. That average withdrawal amount might increase as members’ savings components begin to grow with monthly contributions.

“We’ll probably have another bump in withdrawals in March next year, the start of the new tax year. For people who might have taken it now, their savings pot will have built up to above the R2 000 minimum amount by March. It’ll be interesting to track how many people have taken both this year and then the next,” he said.

Commenting on the 971 claimants who received no payout because their withdrawals were consumed by outstanding tax obligations, Van Zyl acknowledged that members were understandably upset.

He noted that once a fund applies for a tax directive and it has been issued, members cannot reverse their decision to withdraw once they realise how much tax they will pay.

“I think that is something our members don’t understand. So once SARS issued a tax directive, unfortunately, it’s done. You can’t undo it. We communicated and stressed this in advance, but clearly, we need to do a bit more communication regarding that,” he said.