Two-pot retirement system will bring major change in R3.27 trillion industry

South Africa’s private retirement industry that manages about R3.27 trillion in assets will change completely on 1 September when the two-pot retirement system is implemented. While pension funds are working to get ready, many consumers only have a vague idea of how it will work.

Natasha Huggett-Henchie, a principal consultant at NMG Benefits, warns that working South Africans should seek professional retirement benefit counselling before they make any major decisions around making withdrawals from their retirement funds.

“This is especially critical ahead of the implementation of the two-pot retirement system. “There is a lot of confusion and concern in the marketplace about the impact of the new system, with many analysts saying it could have dire long-term consequences for fund members who already save too little for retirement.”

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She says it is important that people are not tempted to treat their retirement funds as a transactional account.

“That is why we recommend that regulators allow only annual withdrawals, with a free once-off withdrawal and one free withdrawal every five years. Any further withdrawals should be subject to an administration fee. Remember also that every withdrawal will be taxed at your marginal tax rate.”

Two-pot retirement system will benefit consumers in the long run

However, in the long run, NMG believes the move could actually benefit consumers, as it will prevent people from having to take out expensive short term loans. At the same time, being forced to preserve two-thirds of their funds over the long term (and not cashing in when they change employers) will improve retirement outcomes for most fund members.

“The important thing is to talk to a counsellor who specialises in retirement plans. This ensures that you will have the correct amount of money saved when you retire and that your resources will be managed in a safe and predictable way,” Huggett-Henchie says.

The intention of the new two-pot retirement savings system is to promote the preservation of retirement fund investments until members retire, while also allowing them access to a portion of their accumulated savings during their working years.

Jaya Leibowitz, manager of the retail legal team at Allan Gray, says it is critical to understand that the go-live of the system hinges on many factors, including:

• the regulations being finalised and signed by the president;
• the Financial Sector Conduct Authority (FSCA) being able to timeously approve fund rule changes;
• Sars being able to issue tax directives for savings withdrawal benefits; and
• providers’ readiness.

Withdrawals from the savings component cannot be actioned without all of these being in place.

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All contributions will be split into two components

Leibowitz explains that from the date of implementation of the two-pot system, all contributions to provident, pension and retirement annuity funds will be split into two components:

• One-third of the contributions will be credited to a savings component, which members can access before retirement in the event of an emergency;
• the remaining two-thirds will be credited to a retirement component, which will be inaccessible before a member retires. and must be used at retirement to buy a pension-providing product.

The components will work like this according to Allan Gray:

However, she says, what complicates matters is that government must cater for the rules currently in place and manage the transition to a world where the entire retirement fund system works in the new way.

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The transition and vested rights

Vested rights refer to the rights that you already have in relation to your retirement investments, which the new legislation protects, Leibowitz explains. “Immediately before 1 September all your retirement investments will form part of your vested component and all the rules that currently apply to your retirement investments (including those relating to accessibility and tax) will continue to apply to this component.”

However, she says, if you are a member of a provident fund and you were a member of that fund and were 55 or older on 1 March 2021, you will be excluded from the two-pot system, unless you decide that you want to participate.

“Exclusion means that nothing will change for you and all the rules currently in place for your retirement fund account will continue to apply. If you choose to participate in the two-pot system, from the month after you made your election, your contributions will be allocated to the savings and retirement components, while the value in your account immediately before your election will remain in your vested component.”

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Leibowitz also warns that while the savings component allows you access, it is prudent to guard against thinking of it as a discretionary savings account.

You will actually have three pots in the two-pot retirement system

Come 1 September, members of retirement funds will be able to withdraw a small portion of their existing savings immediately once the two-pot system is implemented. This is commonly referred to as ‘seed capital’. It will work like this according to Allan Gray:

Leibowitz says there are a few things about this withdrawal benefit that are important to bear in mind:

• Value limit: The seed capital will be limited to 10% of the amount in your retirement fund account on 31 August 2024, subject to a maximum amount of R30 000. For you to have access to a withdrawal benefit of R30 000, the value of your retirement fund account on 31 August 2024 needs to be at least R300 000. For example, if you have R30 000 in your account, R3 000 will be accessible, if you have R150 000 in your account, R15 000 will be accessible and if you have R900 000 in your account, R30 000 will be accessible.
• Tax: Any amount accessed in cash as a savings withdrawal benefit will be taxed at your marginal income tax rate, which will depend on your taxable income for the tax year, including the withdrawal amount. The retirement fund or its administrator will apply for a tax directive from Sars and deduct the tax before paying you your benefit.
• Timing: The current version of the legislation permits retirement funds to allocate the seed capital to the savings component (to making it accessible as a withdrawal benefit) on or after 1 September 2024. If a retirement fund’s rules have not yet been approved by the FSCA, or the fund’s systems cannot cater for the seed capital on 1 September 2024, withdrawals may be delayed.