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South Africa’s new two-pot retirement system is meant to revolutionise how pension savings are managed and accesssed.
It’s meant to safeguard pension savings for South African investors because, for too long, savers have found themselves short-changed when they come to live out their golden years. Liberty points out that in the current climate, 89% of South Africans will need to work at least part-time after they reach retirement age, while 40% of South African retirees will only be able to maintain their pre-retirement lifestyle by selling assets and depending on the family.
So, will the new system help with the objective of preserving pension pots for all South Africans to ensure they retire comfortably?
How does it work?
The new system is meant to triple retirement savings in South Africa, according to Ruvan Grobler, wealth manager at Bovest. It’s expected to take effect next year on 1 March and under the new system, retirement fund members will have three components in their savings: the vested pot, the savings pot, and the retirement pot.
But while it’s split into three it’s referred to as a ‘two-pot’ system as two-thirds are left untouched while people can withdraw from the one-third left over. Grobler explains: ‘One-third of the contributions will go into the savings pot and the other two-thirds of the contributions will go into the retirement pot. The vested pot will be made up of all contributions made before 1 March 2024 where the current retirement rules will apply.’
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How much can you withdraw from your pension?
There is a bit of confusion around this. Grobler says: ‘Members can only withdraw up to R25,000 annually of their existing savings from March 2024. Withdrawals from the savings pot will be included in the member’s taxable income and taxed at the relevant marginal rate.’
But Nosipho Nhleko, Liberty’s investment product specialist, says there’s a misconception that the maximum value that a member can withdraw from the savings component every year is R25,000. She explains: ‘There is, in fact, no upper limit on what can be taken from the Savings Component each year. There is only a minimum value of R2000 that can be withdrawn from the Savings Component. The value of R25,000 that has been referred to in the draft legislation relates to the maximum once-off amount of “Seed Capital” that will be used to “seed” the member’s Savings Component.
‘At the date of implementation, 10% of a member’s accumulated retirement savings (capped to a maximum of R25,000) will be automatically deducted from those retirement savings and transferred to the Savings Component. This “Seed Capital” will be the opening balance for a member’s Savings Component.’
Should you take money from the savings component?
While there’s access to this savings component, Nhleko cautions against using it and advises investors to view it as a last resort. ‘In our view, taking withdrawals from the Savings Component will significantly diminish a member’s overall retirement savings. Members are encouraged to preserve benefits in the Savings Component until retirement.’
To highlight the gravity of withdrawing, Nhleko conveys an example that does not include tax and fee impacts but that highlights the difference pension preservation could make. ‘Imagine two people – Thabo (40) and Mandla (40) – who have decided to save for retirement by contributing to a retirement annuity fund (RA). They both contribute R 1,000 per month to the same RA and the underlying investment portfolio which grows at 10% per year.
‘Thabo decides to take advantage of his annual access to the Savings Component and withdraws 10% every tax year to help with various emergencies. Mandla does not withdraw anything from the Savings Component of his RA and simply allows it to grow until his retirement. At the end of 20 years, Thabo has R 230,175 saved in his RA. Mandla has R 723,987 saved – which is more than three times the amount Thabo has. This has a significant impact on Thabo’s retirement outcomes.’
While people are encouraged to preserve savings, what the new legislation does do is offer more flexibility. ‘By allowing fund members the privilege of making transfers between pots – such as from the ‘savings component’ to the ‘retirement component’, or between the ‘vested component’ and the ‘retirement component’ – they gain a previously unheard-of degree of control over their financial future,’ says Wouter de Witt of Gravitas Tax.
Will administrators meet the deadline?
As with many new rule changes, there is speculation that the new two-pot system won’t be implemented in March 2024 because administrators won’t be ready in time. This means that the government could kick the can down the road. It’s important, therefore, to keep an eye out for any updates and to speak with your financial advisor or pension provider.
‘It is important for members to note that the two-pot legislation is still in draft, and discussions are still being held between the National Treasury and various industry bodies regarding structural aspects of the proposed Two-Pot retirement system.
‘Liberty will endeavor to keep all its stakeholders informed with the latest updates, given the importance of the impact of the new system on retirement savings and retirement outcomes,’ adds Nhleko.
