Misconceptions about the two-pot retirement system: What you need to know

There has been a lot of interest in the two-pot retirement system that will be implemented in September and a lot of misconceptions as well.

The Two-Pot Retirement System will bring the most extensive changes in retirement legislation since the annuitisation of provident funds in 2017 known as T-Day, Blessing Utete, managing executive of Old Mutual Corporate Consultants, says.

Feedback Old Mutual Corporate gathered from people who attended various conferences revealed that many had the same questions or concerns about the practical implementation of this important retirement reform.

Utete says specific issues highlighted include the rules governing withdrawals, the potential for fraud and the tax implications associated with the two-pot retirement system.

“These concerns should not overshadow the significant benefits of the system, which include bolstering long-term financial well-being and providing more flexibility.

“This will be achieved by mandating the preservation of two-thirds of retirement savings for future income while permitting limited access to one-third for urgent financial needs.”

However, Utete says, pension fund members must be thoroughly prepared and educated for the system to be successful as was the case with the T-road reforms in 2017.

T-Day reforms in South Africa, also aimed at improving retirement security, were delayed to address concerns over implementation.

“We must confront several misconceptions head-on and significantly ramp up employee financial literacy initiatives around retirement reforms specifically to facilitate a successful integration of the system.”

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These are the misconceptions Old Mutual identified:

Misperception 1: The transition to the two-pot system affects all members’ savings and future contributions in the same way.

Reality: For the majority of South Africans, the transition is designed to be automatic for all eligible retirement fund members, requiring no action on the part of most. Pre-existing savings on the effective date will automatically be allocated to the vested pot, with up to 10% of these savings, capped at R30 000, seamlessly transferred to the savings pot.

Members of provident funds who were older than 55 years on 1 September 2024 will be the exception. Because they are eligible for retirement, they will by default remain in their existing pension and provident fund. Instead, they will get a choice to structure their savings according to the two-pot system and will have 12 months to make the selection.

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Misperception 2: The Two-Pot Retirement System will enable individuals to access their retirement funds beginning on 1 September 2024.

Reality: Although the legislation will be in effect from 1 September, disbursements will not start immediately. Significant system preparations and a series of processes, such as deployment, seeding calculations and verifications, must be done first, likely taking at least five working days before a payout.

Funds will have to communicate to members about the claims process and when they will be ready to start processing claims. A seeding calculation involves determining the initial amounts to be allocated to different “pots” or accounts based on existing retirement savings.

This calculation depends on the current amount of savings in each member’s retirement account and their market value. This means that this could take several working days to weeks, depending on the rules of the fund.

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Misperception 3: Access to retirement savings under the new system must happen immediately on 1 September 2024 or members will lose their payouts.

Reality: Members are not required to make any immediate decisions on whether to withdraw on 1 September 2024. Instead, they maintain full control over their funds, with the flexibility to access their savings pot at any future point when it becomes necessary. It will be more beneficial for members to allow their savings to remain invested, thereby potentially increasing their value.

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Misperception 4: The two-pot retirement system will lead to underperformance of assets, reducing the long-term value of savings.

Reality: The structure of the two-pot system, consisting of a ‘retirement pot’ for long-term growth and a ‘savings pot’ for short-term needs, is an ‘accounting exercise,’ not an asset allocation or investment strategy change.

The adjustment of the two-pot system, dividing funds into a ‘retirement pot’ for long-term growth and a ‘savings pot’ for short-term needs, is primarily a matter of organising and categorising funds within existing financial structures.

Regulation 28, which governs asset allocation, will continue to ensure diversified portfolios, mitigating risks and supporting consistent returns.

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Misperception 5: The two-pot retirement system introduces tax complexity.

Reality: The two-pot system maintains the existing taxation framework, providing straightforward guidelines to help businesses and members manage their contributions effectively.

Withdrawals from the savings pot before retirement are taxed as part of the individual’s annual taxable income, calculated using their marginal tax rate. Total contributions to retirement funds still receive the significant tax-deductible status they always received.

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Misperception 6: The two-pot retirement system invites fraud and corruption.

Reality: Retirement funds already employ robust measures to protect against fraud and ensure the security of members’ savings and personal data. Most funds in South Africa have advanced security protocols, including encryption and multi-factor authentication, to prevent such risks.

As with any new capability, creating a new transaction capability, as introduced by the two-pot legislation, does mean that it will open funds to increased fraud risk.

However, it is how this risk is managed and the security measures put in place that are crucial. It is essential for members to stay vigilant and informed about potential threats, especially criminals posing as representatives of their retirement fund.

“We encourage members to regularly update their security settings, verify communications from their fund administration before agreeing to withdraw any savings and report any suspicious activities. These proactive steps can significantly enhance their security and peace of mind,” Utete says.