Two-pot retirement regulations have sweet and sour ingredients
The proposed two-pot retirement system to be implemented from 1 March next year has stirred up some heat in the retirement fund industry as retirement funds and administrators try to ensure their readiness.
While there has been much emphasis on the fact that savers will be able to access a “savings pot” in the event of emergencies, the new system will also make two-thirds of your retirement savings inaccessible until retirement. Speaking at a media roundtable this week, Michelle Acton, retirement reform executive at Old Mutual, says this is a positive benefit that few people are talking about.
“Before 2016, there were three different types of retirement funds – provident funds, pension funds and retirement annuities – all of which were taxed differently and this caused much confusion for the average man on the street.
“Since then, the system has been aligned so that regardless of which retirement savings product you use, the tax benefits are the same – you can claim a tax deduction up to 27.5% of your pensionable income, up to a maximum of R350,000,” she explains.
The issue then turned to the accessibility of funds.
While retirement annuities were 100% locked until retirement, you could access the entire savings in your pension or provident fund whenever you changed jobs. This has led to severe depletion of retirement savings over the years, with South Africans even deliberately resigning to access their retirement savings.
Acton says Old Mutual’s statistics show that more than 90% of retirement fund members exercise the option to withdraw all of their retirement savings when changing jobs, instead of transferring the money to a preservation fund, a new fund or simply leaving it invested with the original fund.
Under the proposed two-pot retirement system, you can access one-third of any contributions you make towards your retirement savings from 1 March 2024.
To address the fact that some South Africans battling to cope with an increasing cost-of-living crisis will need access to funds immediately, National Treasury’s draft legislation states that retirement fund members will be able to access “seed capital” – or a portion of their available balance – immediately.
The seed capital will be a minimum of R2,000 or 10% of your savings in the “vested component” as of 29 February 2024, capped at R25,000.
This money will not be accessible without costs – withdrawals will be taxed at your income tax rate, which immediately makes withdrawals a less attractive prospect for those in the higher income tax brackets. This means, for example, someone paying income tax at a rate of 36% and who wants to withdraw R25,000 on 1 March next year, would pay R9,000 tax and only withdraw R16,000.
Acton says retirement funds are now “doing quite a bit of work to get ready” for what is a fundamental change in the South African retirement fund system.
“The challenge is that even with all the work we’re doing, we don’t have all the answers yet. If the legislation is not finalised soon, we can’t close off the finer details in time,” she says.
Acton notes that the savings pot is not going to “solve anyone’s financial woes on day one” as it will take time to build up a significant amount in that pot.
You will only be able to access or withdraw from your savings pot once a year, and although the seed capital amount is capped, there is no maximum cap on withdrawals post-2024. This means that retirement fund members have a minimum withdrawal amount of R2,000, but could theoretically withdraw their entire savings pot once a year.
Blessing Utete, managing executive of Old Mutual Corporate Consultants, points out that when you make a retirement fund withdrawal currently, the administration fee is already factored into your monthly admin fees.
“Going forward, there is going to be a great deal of admin required around withdrawals, which means retirement funds are likely to charge members an admin fee to enable the transaction,” he says.
Utete provided the following example:
Member A has a pension fund balance of R100,000 on 29 February 2024 and pays a monthly contribution of R900 at the end of each month. On 1 March 2024, 10% or R10,000 will be transferred to the member’s savings pot. At the end of March, the R900 contribution is split into thirds, with R300 added to the savings pot and R600 going towards the retirement pot.
This means the amount now eligible for withdrawal will be R10,300. If the member withdraws the full amount, it will take them five years to build up an amount of R22,500 in their savings pot (assuming no further withdrawals are made).
The retirement savings contributions over the five years would be R60,6oo, and the initial retirement savings amount of R90,000 would have grown to R144,000. So, the total retirement savings available in five years would be R227,100.