Two-pot retirement system: Is everyone ready?

With just two months left before the two-pot retirement system is implemented on 1 September, pension fund members are asking if everyone is ready.

It involves pension funds changing their rules, making new calculations and President Cyril Ramaphosa signing the Pension Funds Amendment Bill into law.

The president already signed the Revenue Laws Amendment Bill that establishes the two-pot retirement system, but he must still sign the Pension Funds Amendment Bill.

However, this is nothing to worry about, Michelle Acton, retirement reform executive at Old Mutual, says. “We expect the Bill will be signed into law before 1 September. “

Withdrawals expected to rise after 1 September

With so many pension fund members interested in the two-pot retirement system there will likely be a high number of withdrawals after 1 September. What do they want to use the money for? Acton says the primary reason for withdrawal seems to be to settle debt.

Meanwhile, the Financial Sector Conduct Authority (FSCA), has launched a Know Your Rights campaign aimed at educating members and trustees of pension funds about their rights and responsibilities.

Some employers withhold pension fund contributions

As part of this campaign, the FSCA points out that it identified over 4 178 South African employers who are behind in making retirement fund contributions towards employee retirement funds, which ultimately form part of the employee remuneration package.

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This means that these employers are withholding what is owed to their employees and are in violation of Section 13A of the Pension Funds Act which regulates the payment of retirement fund contributions.

Implications for members who want to withdraw

What will the implications be for pension fund members who want to withdraw funds under the two-pot retirement system after 1 September? Acton says the ability to withdraw is independent of employer contributions (which should be up to date). 

“It may impact the seeding amount, as seeding is based on the value on 31 August. Therefore, if contributions are not paid into the fund before 31 August they will not be included in the seeding calculation.”

Not everybody understands how the two-pot retirement system will work so soon before implementation, Phil Le Feuvre, member of the South African Reward Association (SARA), says.

“There is already a lot of confusion about what the two-pot retirement system is and how it will work. Fund members, remuneration practitioners, unions and other stakeholders are all seeking answers.

“Even fund administrators need information, although it is of a more technical nature, to ensure they and their operations are ready in time.”

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Preserving retirement savings

Le Feuvre says South Africans, whether they are employees or independent earners, typically contribute part of their monthly salary to one or other retirement fund. When they change jobs or become unemployed, any accumulated savings in their fund are paid out to them after being taxed.

“Unfortunately, the temptation to squander this money on luxuries or necessities is too great and it is seldom re-invested towards their inevitable retirement. Covid made this behaviour even worse when many people lost their jobs and used their payouts to survive. Some, still employed but suddenly on lower pay, resigned just to get their hands on more cash.”

However, he says this was not the first time the problem was recognised. There has been a debate around a method for preserving retirement savings while affording members access to a reasonable portion for emergencies for the last 30 years or more.

Finally, the two-pot retirement system was developed to offer a rational compromise, although it is not without its challenges.

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The vested component and two new pots

Le Feuvre explains that currently, members have existing savings in their retirement fund from past contributions, called the vested component. On 1 September two new “pots” will be introduced into each member’s fund and all future contributions will be paid into these two pots:

• The savings pot will receive one-third of your contributions. Members can draw any amount from this pot once a year, provided it is not less than R2 000 and they are limited only by the amount of savings they have at that time.
• The retirement pot will receive two-thirds of your contributions. Members cannot withdraw from this pot at all, except as a lump sum when they opt to retire after the age of 55.

For example, for a contribution of R3 000 per month, R1 000 will go into the savings pot and R2 000 will go into the retirement pot.

On 1 September, 10% of your existing savings (vested component), but not more than R30 000, will be transferred to the savings pot as seed capital. This just means funds will immediately be available for members to withdraw.

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How much will you be able to withdraw?

The initial withdrawal can only be as much as you have in your savings pot and cannot be more than R30 000, but there is no cap on future withdrawals and members are not compelled to make a withdrawal in any given year, Le Feuvre says.

“Apart from this seed capital, the rest of the vested component will remain untouched and is not part of the two-pot retirement system. If you leave your employer, the vested component will be paid out to you, after being taxed. Otherwise, it will form part of the lump sum payout on your retirement.”

He emphasises that pension fund members must remember that they will be taxed when they withdraw an amount from the savings pot. Why must the tax man get a share? Le Feuvre says income earmarked as a retirement contribution is not taxed when it is earned but only when the lump sum is paid out in the future.

“Therefore, when you withdraw from your savings pot, you are taking untaxed income that will no longer be used for its intended purpose to fund your retirement. This renders the tax on it immediately due.”

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Watch out for the tax man and other consequences

While the release of the vested component continues to be taxed against Sars’ severance benefit tax tables, savings pot withdrawals are taxed at the member’s marginal rate, he says. “In South Africa, a taxpayer’s annual salary is split into portions, with each portion taxed at an increasing percentage. The highest percentage is the marginal rate.”

That means a member who withdraws R10 000 at a marginal rate of 31% may be disappointed to find that they lose R3 100 to tax and only get R6 900 to spend. In addition, since your withdrawal relies on a tax directive, you must comply with Sars before the funds can be released.

However, Le Feuvre says, that while people may be excited at the prospect of readily available cash come 1 September, it is a good idea to consider the consequences. “The savings pot was created for emergencies, not lifestyle enrichment. The more members dig into their savings, the less they will have for retirement in the long run.”

It is also likely that fund administrators will be inundated with applications for withdrawals when the two-pot system is implemented. “This, along with their own security protocols to limit fraud, could see slow turnaround times that could make you wait for your money to be paid out.”