Two-pot retirement system: changing retirement saving in 2024

The biggest change in retirement saving in South Africa happened in 2024 with the introduction of the two-pot retirement system that came into effect on 1 September, giving pension fund members access to their retirement savings, but also forcing them to leave the rest intact even if they change employers.

The two-pot retirement system is a reform initiated by National Treasury that allows pension fund members to make partial withdrawals from their retirement funds before retirement while preserving a portion that can only be accessed at retirement to help improve retirement outcomes.

According to Treasury, this means that pension members do not have to resign to access part of their retirement benefit when they have a financial emergency such as medical expenses or retrenchment. Retirement savings are often the only savings people have, and the two-pot retirement system is meant to support long-term retirement savings while offering flexibility to help fund members in financial distress.

Before the implementation of the two-pot retirement system, some pension fund members resigned to access their retirement fund savings to pay off debt, which Treasury says is detrimental from an economic, financial planning and retirement provision point of view.

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Two-pot retirement system offers access to a third of retirement savings

The reform brought by the two-pot retirement system created a savings component, a retirement component and a vested component. Since 1 September retirement contributions have been split by pension funds into a savings component and a retirement component.

One-third of a member’s total contributions go into the savings component and two-thirds into the retirement component. Pension fund members can now withdraw any amount from the savings component for a minimum amount of R2 000 once every tax year, which means that members will be able to withdraw again from 1 March 2025.

The withdrawals are taxable based on the member’s marginal tax rate. Thousands of people who applied to withdraw from the savings pot of their retirement savings ended up with nothing because they owed Sars money, which was paid first, while others paid so much tax that they also received R0.

In addition, thousands of workers could not withdraw money from their saving pots under the two-pot retirement system because their employers did not pay over their contributions to their pension funds.

This affected primarily workers at some municipalities, as well as truck drivers, private security staff and factory workers who found that there were no funds available in their saving pots.

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Billions paid out already under two-pot retirement system

By 18 November, just over two months after the launch of the two-pot retirement system, the South African Revenue Service (Sars) reported that it issued over 1.9 million directives to the value of over R35 billion so far. By then some pension fund administrators reported that fund members had withdrawn about R25 billion from their retirement savings.

Government pension fund members made the most withdrawals based on the amount paid out at R9.3 billion, with members with AlexForbes in second place atR6 billion, followed by Old Mutual with R3.2 billion, Sanlam Corporate with R2.3 billion, Momentum with R3.5 billion and NMG Benefits with R840 million.

Pension fund administrators are expected to make up to R1.25 billion in administration fees by the end of February 2025 according to Keystone Actuarial Services which surveyed administrators in September to find out how much they will charge for withdrawals.

Keystone also pointed out that savings pot withdrawals under the two-pot retirement system have fundamentally changed the nature of these administrators to where they now have to also fulfil the role of a “bank” where members can make periodic cash withdrawals.

Administrators now handle an increased number of claim payments, possibly as high as four or five times the normal number of annual payments, and this will reoccur if members withdraw funds every year.

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Impact of two-pot retirement system

The implementation of the two-pot retirement system is also expected to have a wide-ranging impact on investors, markets and the South African economy with pension fund members expected to withdraw as much as R100 billion from their saving pots.

Izak Odendaal, chief investment strategist at Old Mutual, said earlier that the two-pot retirement system will have three immediate effects:

• As these withdrawals are taxed, government’s coffers will swell. In the February Budget an additional R5 billion in tax revenue was pencilled in for tax from two-pot withdrawals.
• Consumers will have more money to spend. They will probably use a portion to settle debt, but they will spend the rest, since it is unlikely that people will withdraw savings only to save it again.
• Pension funds will have to sell some investments to realise the cash payouts, but it should not have a disruptive impact on local financial markets, as they will most likely be staggered over a few weeks or even months.

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Many warnings against withdrawing under two-pot retirement system

While many people could not wait to lay their hands on the portion of their retirement savings under the two-pot retirement system, there were many warnings from fund managers that withdrawing from your savings pot could adversely affect your retirement savings and result in you not having enough money to retire on.

Marianne Smith, financial adviser and franchise principal at Consult by Momentum, warned earlier that even a once-off withdrawal of R30 000 from your saving pot will mean a reduction of around R500 000 in retirement savings over a 25-year period.

“Accessing your retirement savings should be a last resort because it can compromise your future financial security.”

ALSO READ: Two-pot retirement system: balancing needs and long-term security

Main objective of two-pot retirement system lost in the frenzy to withdraw

With so much money available and the frenzy to withdraw, the main objective of the two-pot retirement system, the compulsory preservation of retirement savings, was almost forgotten.

While most of the media attention on the two-pot retirement system has been on the ability to access the savings pot, Odendaal said the more important impact over time will come from compulsory preservation.

“At an individual level, people should end up with substantially higher retirement benefits, all else being equal. Modelling by Old Mutual actuaries suggests that the average retirement benefit of pension fund members could increase from the current two to three times of final salary, to up to nine times of final salary, even with the full savings pot accessed.”