The two-pot lid is lifted – and providing for education is a priority for South Africans

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The two-pot lid has been lifted, with South Africans clamouring to access their retirement savings since the savings-pot withdrawal allowance came into effect last month.

And with a minimum annual withdrawal amount of R2000 and no maximum stipulated, this allowance could potentially devour a significant chunk of South Africans’ retirement savings.

According to the SA Revenue Service (Sars), a total gross lump sum of R21.4bn has been paid out under the two-pot system; a figure that will undoubtedly increase as the weeks pass.

What are South Africans doing with this new source of funds? According to the latest data from Discovery, two out of every 10 claimants have said that they will use the money to cover education-related expenses.

Two-pot system withdrawals hit R21bn

14 Oct 2024

Vuuren says that these figures highlight the deepening cost of living crisis faced by South Africans.

“It’s telling that the data revealed a clear connection between income levels and withdrawal rates. The figures showed that 38% of low-income earners made withdrawals, followed by 29% of middle-income earners, 12% of high-income earners, and only 4% of very high-income earners.”

But if South Africans struggle to cover their children’s schooling and other essential education expenses, where does this leave us as a country?

Youth dropout crisis

Recent data from Statistics South Africa (2024: Q2) reveals that over a third (35.2%) of youth aged 15 to 24 are Not in Employment, Education, or Training (Neet).

“Additionally, research indicates that out of every 100 learners who start Grade 1, only 40 will sit for their matric exams, and just 12 of those will pursue higher education at a university or college,” adds van Vuuren.

A significant factor behind the soaring dropout rates is the financial burden of education. A 2024 study, Understanding Why Youth Drop Out of School in South Africa, identified family-related challenges – such as lack of support and financial struggles at home – as one of the top three causes of school dropout.

“One thing all South Africans unanimously agree on is that education is the answer to the country’s societal and economic woes. However, education inflation is outpacing CPI: this year alone, education was 6.3% more expensive than in 2023.

“Moreover, the average cost of education for a child from nursery school to college currently sits at around R1.2m for public schooling (more for private). It’s no surprise that South Africans want to access their retirement savings to cover their children’s education.”

However, while the deepening cost of living crisis and the rising cost of education might explain why South Africans are dipping into their retirement savings, it still doesn’t mean that it’s a good idea.

“Ideally, the savings pot should be left alone, with the money preserved for retirement. Accessing this source of funds early will leave you vulnerable in your later, non-earning years,” says van Vuuren.

Instead of dipping into your retirement savings to cover your child’s education, there are three alternatives you could consider.

Budgeting

If you are fortunate enough to take home a decent paycheck, you could budget for education costs from your monthly income. However, this does come with drawbacks, says van Vuuren.

“Your normal earnings might not accommodate unplanned education expenses, such as school or sports trips. Also, if something happens to impact your ability to earn an income, this will be difficult to maintain, and thus savings and insurance need to be considered as well.”

Education savings fund

Putting aside money for education is a good idea. “Taking education inflation into account, most financial planners will recommend you put aside around R2,000 per month, increasing this amount each year to keep pace with inflation,” he says.

However, saving consistently is key, as every month you delay or miss sets you back significantly.

Education insurance

This is a relatively new category of insurance, but one that is set to change the game of financial services forever. Education insurance offers the policyholder the assurance that should something happen to their ability to earn an income, their child’s education is provided for, through comprehensive cover allocated to education expenses only.

Unlike life insurance, which is not ring-fenced for any use, education-specific insurance helps to ensure that funds do not get swallowed up by debt and other expenses, or mismanaged down the line.

It is also very affordable. “At Futurewise, for example, our monthly premiums start at R220 per month, says van Vuuren, “which covers a child for tuition and other schooling expenses all the way up until the age of 22. The cover level also automatically adjusts anually to keep pace with inflation, both pre-claim and during claim.”

Ideally, your financial strategy should include a combination of education insurance and savings, he says, to ensure your child’s education is provided for and their future secured. “This will also help to remove the risk of dipping into your retirement savings to cover education-related costs, helping both you and your family to remain financially secure.”