Could pension-backed lending be a thing now that we have the two-pot system?

South Africans should fully consider the inadvertent consequences that may result from making early withdrawals from one’s two-pot retirement fund set-up now that they have the option to, Victor Bucarizza, a wealth manager at GIB Financial Services, cautions.

This comes after National Treasury and SARS said that it will soon implement some changes and clarifications to the original proposals on introducing the new retirement system.

Earlier this year, the 2022 Draft Revenue Laws Amendment Bill was released for public comment, setting out proposals for implementing a new system to provide more flexibility for members.

Balancing a solution to two problems

The system seeks to strike a balance between two problems: maximising retirement savings by minimising early withdrawals; and allowing for early access to retirement savings to address unforeseen events, such as Covid-19’s financial consequences.

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There may be some unintended consequences too, not least of which will be severe strains on retirement fund administration, Bucarizza also cautioned. “The number of retirement fund members drawing from their savings pot will impact administrators potentially leading to delays in paying out. Such payouts by their nature are likely to be unforeseen events and time sensitive.”

“Furthermore, it will reopen the door to the practice of pension-backed lending. Having a portion of capital available may tempt banks to see it as a source of secured lending, a first step in allowing pension-backed lending, he said.

One pension pot for emergencies, the other for the sunset years

Bucarizza outlined the implications of the new rules: “From the date the new system comes into effect members in the future will be able to make one taxable withdrawal a year from their savings ‘pot’, where up to one-third of their contributions can potentially be withdrawn. The remaining two-thirds or more retirement ‘pot’ has to be preserved until retirement and used to purchase an annuity.”

“This is not retrospective: it is important for members to note the new rules will not affect their existing retirement savings and contributions up until the date of implementation. These remaining savings and their subsequent investment return will retain their ‘vested rights’ – meaning that the rules that applied when members made those contributions will continue to apply to them.”

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“All contributions will continue to benefit from the tax deduction subject to existing limits. However, if a member exercises their right to make a withdrawal from their savings pot, this amount will be added to their taxable income for the year thereby negating the tax deduction. They will thereafter not be permitted to make further withdrawal from the savings pot for a period of at least 12 months,” he explained.

Nothing changes for those who don’t withdraw

Nothing will really change for those who had no plans to make a withdrawal from their retirement fund before retirement, Bucarizza said. “But those who will need to make such a withdrawal of up to one-third pre-retirement will deplete the amount available as a lump-sum upon retirement. The main change is that they have greater choice in the event of an unforeseen need.”

The amendments address the historical reality that many members in financial difficulties had in the past felt obliged to resign their jobs with the sole intention of ‘unlocking’ their retirement savings, notwithstanding the hefty tax bill on it.

Compiled by Devina Haripersad.