Two-pot retirement system: still some misconceptions a month later

There are still misconceptions among people who want to withdraw some of their retirement funds under the two-pot retirement system that was implemented a month ago on 1 September. This includes that they can withdraw R30 000 and that if they do not withdraw now, they will lose the money and the opportunity to withdraw.

Anneke Hanekom, head of reputation management and group CEO projects at Momentum, says some pension fund members knew some of the rules but were not aware of other rules. Momentum identified these misconceptions:

• Some people think that they can withdraw R30 000, only to find out they qualify for less because they were not aware of the rules determining the withdrawal limit;
• Some are under the impression that they can withdraw R30 000 each year, but they can only withdraw what they have available according to the rules;
• Some believed that they would receive the money immediately as if they withdraw it from an ATM;
• Some were not fully aware of the tax implications that they cannot withdraw before their taxes were not in good standing at Sars, that withdrawal is subject to personal income tax and that the withdrawal amount can move you into a higher tax bracket;
• Some people still did not understand the initial three pots and thereafter the two pots.

“We did note that people who submitted claims via financial advisers were better informed. About 3 000 clients decided not to withdraw once they realised the tax implications.”

ALSO READ: Beware of these myths about the two-pot retirement system

Two-pot retirement system shows financial pressure

Vickie Lange, head for best practice at Alexforbes, says the company noted these trends during the process:

• The high volume of claims indicates that many members face financial pressure and require short-term cash relief;
• Middle-income earners make up the largest proportion of claimants;
• More higher-income individuals are claiming than initially expected;
• Single parents with young families are more likely to claim;
• Married individuals without children are the least likely to claim;
• Members from Limpopo and the Eastern Cape have higher claim rates compared to other regions;
• Homeowners are less likely to claim than non-homeowners;
• A large portion of financially distressed members must still claim, suggesting that claim volumes will remain high until the end of the year;
• About 25% of claims were unanticipated, as these members were not under financial pressure. These members possibly misunderstood the two-pot system or external misinformation encouraged withdrawals.

“Some members queried fluctuations in the value of their savings pots, highlighting the need for more education on how market performance affects these balances.

“We expect trends to evolve as more members withdraw from their savings pots and we will continue to share updated insights to help address fund-specific concerns.”

Siphamandla Buthelezi, head of platforms at NMG Benefits, says the most prevalent misconception among members who visited their offices was that they had to apply for a withdrawal under the two-pot retirement system before the end of the month.

“Most members were under the impression that this would be closed and they would lose their money if they did not apply immediately.“

ALSO READ: Two-pot retirement system: Do you know enough?

Reasons people gave for two-pot retirement withdrawals

Guy Chennells, chief commercial officer at Discovery Corporate and Employee Benefits, says Discovery’s analysis shows that the two top reasons for people withdrawing funds under the two-pot retirement system are home or car expenses and short-term debt in line with industry expectations that debt repayment would be a key reason for requesting two-pot retirement system withdrawals.

“We found it surprising that a big group of claimants (20%) was using the extra money for education, presumably in the majority of cases for children’s school fees, as well as for day-to-day expenses (11%). Sadly, these are all indications of the cost-of-living crisis faced by so many.”

Chennells says if claimants chose the ‘Other’ category as their two-pot retirement system withdrawal reason, they were asked to give a written example of what it meant.

“While a notable 17% of claimants selected ‘Other’ as their motive for withdrawal, the majority of reasons given here was for home improvements and renovations.

“This is not really recommended as a good use of two-pot retirement system savings because it does not truly classify as ‘emergency spending’.

“However, it is still understandable, because South Africans who want to improve their lives are simply unable to create discretionary spending from their regular income at the moment.”

Only 1% of claimants selected travel as a reason for withdrawal and Chennells says from two-pot savings by 1% of claimants. This is a good sign that the majority of individuals were not accessing their two-pot savings for a whimsical escape to the beach or bush.

ALSO READ: Two-pot retirement system: funds are ready, members are not

Reasons for problems with withdrawals

A handful of claimants experienced challenges due to small errors in their details, such as William spelled ‘Willliam’ (with an extra ‘l’), causing the home affairs verification system to reject an application.

“Discrepancies between details on our system compared with the employers’ or Sars systems also caused a few problems.”

Carla Rossouw, head of tax at Allan Gray, says there was some confusion around how much members can withdraw from their savings component. The minimum withdrawal is R2 000 and members can withdraw up to the full value of their savings component if they need to, subject to one withdrawal only per tax year and subject to tax.

“There is a misconception that withdrawals are capped at R30 000 but this is not the case as this was simply the maximum seeding amount into the savings pot when the two-pot retirement system was implemented.”

ALSO READ: Two-pot retirement system: 48% of South Africans want to withdraw

Tax implications of two-pot retirement system withdrawals

She points out that many members also did not fully appreciate the tax implications of their withdrawals, believing they will receive the full amount requested. “Withdrawals are taxed at your marginal tax rate and any money owed to Sars is deducted. Some members were surprised at the extent of the tax and wanted to reverse their instruction.

“However, once Sars issued a tax directive, withdrawal instructions cannot be cancelled. We strongly encourage people to request a savings withdrawal tax simulation via their Sars eFiling profiles before submitting a withdrawal instruction.”

Rossouw says some members also believe that they must withdraw once per tax year. “This is also incorrect. It is far more preferable not to withdraw unless you have no other option. Your savings component will continue to grow over time as one-third of your contributions are added and you earn investment returns on these contributions.

“The value in your savings component remains available for withdrawal in future. Similarly, withdrawing should not be viewed as an annual event that must happen.”