Two-pot retirement system: If you plan to use it, talk to your fund now

If you plan to withdraw some of your savings after the two-pot retirement system is implemented on 1 September 2024, it is time to start talking to your pension fund now.

South Africa’s retirement sector is undergoing a significant transformation with the introduction of the two-pot retirement system.

John Anderson, an executive for enablement and solutions at Alexforbes, says this new approach to retirement savings marks a significant shift from the traditional savings model and requires pension funds to engage more proactively and directly with fund members.

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He says pension funds and other service providers are already preparing for the change.

“Service providers are gearing up for the transition with enhanced administration processes, digital platforms and member communication strategies. Key aspects include ensuring that funds can handle significant volumes of claims, as well as ensuring that there is sufficient liquidity in the investment portfolios for the anticipated withdrawals,” says Anderson.

He says as we approach the implementation date, it is essential that you engage with your service providers, understand the new rules and prepare for a more flexible retirement savings journey.

Critical to understand the benefits

“It is critical to ensure that individuals understand their benefits, whether they qualify for the new system and determine if their funds can properly support them in the new environment.” In addition, while everyone is anticipating access to their retirement savings, it is important to note that these exclusions apply:

• Legacy retirement annuity funds;
• Beneficiary funds;
• Unclaimed benefit funds;
• Pensioners;
• Members who were 55 years and older on 1 March 2021 who did not choose to opt into the two-pot retirement system between 1 September 2024 and 1 September 2025.

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Anderson says the two-pot retirement system is enabling a goals-driven approach. “While retirement savings is primarily for retirement, there are scenarios where individuals would need access to their savings for emergencies, such as the Covid-19 pandemic.

“The two-pot retirement system aims to provide greater flexibility and individual control over your retirement savings. It enables saving with specific goals in mind, which has been shown to increase savings commitments. For low to middle-income earners, this can be a game-changer in managing financial hardships.”

He says the two-pot retirement system challenges the conventional wisdom of not accessing your savings pot before retirement. By allowing withdrawals under certain conditions, it acknowledges the realities of financial needs before retirement.

How the savings pot can help you:

The savings pot can, if other options have been exhausted, be effectively used to assist people to:

• Get out of unsecured short-term debt (personal or microloans);
• Save for your children’s education in the long term for 18 years and more;
• Access cash at retirement.

This table illustrates the various outcomes an individual would experience under certain withdrawal scenarios based on their needs.

Note: The percentages above represent the individual’s expected replacement ratio.

Anderson emphasises that it is very important to get financial advice before doing anything, weighing the pros and cons of your decisions. “Members are encouraged to seek holistic financial advice. Strategies should include rebuilding after accessing your funds, making additional voluntary contributions and using rewards programmes to ease financial burdens.”

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Remember the taxman

Understanding Sars’ tax specifications which set the basis for applying tax for savings claims at marginal rates, is crucial. Anderson warns that making a withdrawal may push you into a higher tax bracket.

“As set out above, savings withdrawal benefits are taxed at marginal rates. Importantly, these claims have no impact on the retirement tax table. In other words, these claims do not erode the R550 000 that can be taken tax-free on retirement as has been suggested recently,” he says.

You must also remember that payment is not instant. Anderson says some individuals may encounter special additional requirements before gaining access to their savings pot, such as:

• Consent is required from a non-member spouse where divorce proceedings are underway;
• Where the member has a pension-backed housing loan in place, a check needs to be undertaken to ensure that the member will have sufficient money to cover the loan after the withdrawal.

It is important to ensure that administrators have covered all the various scenarios in ensuring the fund is ready for the new environment. Anderson says other issues that could result in delayed withdrawals include:

• The fund’s setup, which requires additional calculations (such as defined benefit funds);
• Tax issues, depending on your circumstances;
• Additional requirements to mitigate fraudulent claims.

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Two-pot retirement system a pivotal change in saving for retirement

Anderson says the two-pot retirement system represents a pivotal change in how South Africans save for retirement. “By encouraging preservation and providing early access to a portion of savings, the reform balances immediate financial needs with long-term retirement security.

“Until now, most of the focus has been on what happens on 1 September 2024. However, the system is not just about the build-up to the implementation date but also about sustaining a solid and sustainable savings strategy after 1 September 2024.”

He says therefore, it is imperative that individuals look at this as an opportunity to assist them in meeting their long-term financial goals and get the right support.