Two-pot retirement system warning

South Africa’s new two-pot retirement system is set to be implemented in March 2024 and could see millions of retirement fund members withdrawing from their savings which could have disastrous consequences later on.

National Treasury recently published revisions to the Draft Revenue Laws Amendment Bill and Draft Revenue Administration and Pension Laws Amendment Bill for public comment.

This new system will implement a “two-pot” system that will allow pension and provident fund members and retirement annuity policyholders to access a portion of their savings before retirement age without resigning.

Partner at Webber Wentzel Joon Chong explained that the new system would create two “pots” for retirement fund members: A “savings” pot and a “retirement” pot.

One-third of fund members’ contributions after 1 March 2024 will be allocated to a “savings” pot from which withdrawals can be made once a year. The other two-thirds will go into a “retirement” pot.

“From the date the new system comes into effect, members will be able to make one taxable withdrawal a year from their ‘savings pot’ (one-third of contributions), but the ‘retirement pot’ (the other two-thirds) has to be preserved until retirement and used to purchase an annuity,” said Chong.

She added that there is also a “third pot”: The vested amount in the fund at the implementation date.

According to retirement reform executive at Old Mutual Michelle Acton, the new draft legislation clarified the industry’s uncertainties regarding the new system, including seeding and accessibility.

Regarding seeding, the legislation specifies that a maximum of 10% of a member’s existing savings, capped at R25,000, will be used to seed the “savings pot”. 

Acton said this addresses the industry’s concerns and ensures funds can navigate liquidity issues effectively.

She welcomed the legislation’s confirmation that provident fund members over 55 can continue contributing to their current fund or move to the new two-pot regime.

In addition, the legislation said the retirement annuity funds underpinned by legacy fund member policies would have the option to apply for an exemption from the two-pot reforms. 

This is important because those policies were not initially designed for pre-retirement access.

The regulations also accommodate defined benefit funds, which calculate benefits using a defined formula instead of member contributions. 

The legislation specifies that the calculation of interests in defined benefit funds and necessary adjustments for the two-pot reforms will be based on the member’s pensionable years of service.

“We are encouraged with the process to date. Commentary closes on 15 July, so we anticipate these regulations will be gazetted early next year,” said Acton. 

“Such certainty is invaluable to us, and we are much more comfortable now that we can move ahead full steam.”

Acton told News24 that Old Mutual expects more than one million members within all the Old Mutual retirement funds to withdraw up to R25,000 each from their pension savings when the new two-pot retirement system comes into effect.

“We have done market testing, and when speaking to members, the majority of middle and lower-income members confirmed they would come forward and claim,” said Acton.

This could be a problem, according to Thys van Zyl, head of product development at Everest Wealth.

While Van Zyl acknowledged that accessing retirement funds during tough times can provide immediate relief, he warned that this must be done cautiously, considering the long-term impact on retirement savings.

Statistics indicate that only about 6% of South Africans will be able to retire comfortably, while the majority will rely on alternative sources of income. 

Since regular withdrawals can significantly diminish long-term savings, the new two-pot system could lower the number of South Africans who can retire comfortably even further.

Van Zyl said that withdrawn money could have grown substantially over time, impacting the final amount available for retirement. The compounding effect of regularly withdrawing savings is not advisable.

In addition, individuals who withdraw retirement funds are unlikely to be able to replenish the withdrawn amount, thereby preventing further growth potential. 

The two-pot system aims to discourage early withdrawals by eliminating the need for job changes or resignations to access funds and provide early access to retirement savings for unforeseen events.

Van Zyl suggested that individuals considering withdrawing retirement funds to be aware of the potential consequences and seek guidance from a financial advisor. 

Withdrawing funds for luxuries or maintaining a certain standard of living can devastate retirement savings. Instead, the focus should be on making sufficient provisions for retirement.