Two-pot retirement system: Do you know enough?

Deciding to dip into your retirement by withdrawing money from the savings pot under the two-pot retirement system sounds relatively easy enough, but do you believe that you know enough to use the system to your advantage?

The two-pot retirement system will be implemented on 1 September and will ensure that all pension fund members are obliged to preserve their retirement savings while giving them access to a small portion they can use in emergencies.

Natasha Huggett-Henchie, principal consultant at advisory firm, NMG Benefits, says pension fund members definitely do not know enough about the two-pot retirement system.

“Despite the fact that the financial services industry has flooded South Africa with communication for the last 12 months, there is unfortunately a lot of misunderstanding out there. It does not help having high profile people going on national TV and further spreading disinformation due to lack of understanding.”

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Misconceptions about maximum, use it or lose it and claim freeze

She says a prime example of a key misunderstanding is that the maximum amount you can take out is R30 000. “Yes, that is the maximum amount that will be seeded on 1 September. But if the market moved up by the time you submit a claim on 15 September, you can get more than R30 000. In fact, if you wait six months to claim, you can take out R30 000 plus 6 months x a third of your contributions plus growth and so on.”

The second big misunderstanding is this is a “use it or lose it” situation, she says. “People are panicking about claiming and do not know that they do not have to take their money out now. They can leave it totally untouched (and in fact they really should leave it untouched unless they really need it now). That is a key message to get out to members.”

Thirdly, she says, we need education around claim processes. “Members must be aware that claims might not be paid for some reason. The biggest reason might be that their fund rules are not yet registered with the FSCA.

“Some administrators might also have a “claim freeze” period while they run their seeding and August month-end updates so that might cause frustration. Remember also the special cases – members with divorce orders, maintenance orders and claims on their pension fund from their employers might not be able to claim.”

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Awareness and understanding vary

Vickie Lange, head of best practice at Alexforbes, says that awareness and understanding of the two-pot retirement system vary among pension fund members. “We made significant efforts to inform members about the new system and its tax implications. This includes a wide range of communications, such as written materials, webinars, videos and other resources.

“We also plan to provide an illustrative calculator to help members estimate the amount they could expect to withdraw and the associated tax implications. Additionally, from 3 September 2024, members will be able to view their actual balances in the various pots. “This will make it easier for individuals to assess the impact of their decisions on both tax and their expected retirement income.”

Lange says she thinks the realisation that there will be tax and fees deducted from withdrawals is slowly dawning and members are more aware that they will get less in their bank accounts than the amount they claimed, but more work and understanding is required here.

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Members do not understand how important it is to preserve their funds

Saqib Hossain, senior manager for technical marketing at FundsAtWork at Momentum Corporate, says pension fund members know a fair amount about how the system works and the access they have to their funds.

“However, there has been very little information or drive encouraging preserving funds or alternate solutions to solve the emergencies that members may face. The two-pot retirement system is a great opportunity for South Africans to review their retirement goals and have more control over their financial situation.

However, it also comes with responsibilities and challenges, such as deciding if they should withdraw money from their savings component. Members should still view their savings component as part of their long-term retirement savings and only withdraw money from it in a financial emergency.”

He says that is why he recommends that they speak to their financial advisers before they make any decisions. Their financial advisers will help them understand the implications of the two-pot retirement system and make the best decisions based on their personal circumstances and goals.