Two-pot retirement system a golden opportunity

The proposed two-pot retirement system that is set to be implemented in 2024 should be seen as a golden opportunity to bolster retirement savings.

This is according to PPS Investments’ institutional client specialist, Nkululeko Kunene.

Kunene said the proposed two-pot system legislation was implemented in reaction to the Covid-19 pandemic, which saw many South Africans dip into their retirement savings to stay afloat. 

The National Treasury took note of this trend and proposed to make changes to the retirement fund system and introduce the “two-pot system”, which is set to be effective from 1 March 2024.

The new system will allow members of pension and provident funds, and retirement annuity investors, to access a portion of their savings without having to resign from their current employers and incur punitive taxes.

It will also allow South Africans to invest a third of their pension and provident funds in a savings portion, including retirement annuities, that would have ordinarily only been accessible at age 55.

The new system, therefore, consists of two “pots”.

• The first “pot” holds two-thirds of a person’s retirement savings which cannot be withdrawn without the abovementioned consequences.
• The second “pot” holds the other third of a person’s retirement savings but is more flexible and allows cash relief in times of severe financial distress.

Kunene said this system provides the perfect opportunity for those who want to bolster their retirement savings and gave three starting points for investors to consider:

1. Invest in diversified, age-appropriate portfolios 

He said the general rule is, “the younger you are when you start to invest, the more risk you should take”, while people who are getting closer to retirement should reduce their risk.

Under the two-pot system, investors’ portfolios must still be in line with Regulation 28 of the Pension Funds Act. This regulation limits where people can invest their retirement savings.

Therefore, pension and provident funds will still need to have default options for members who cannot choose their own investment portfolios. 

“In the case where you want to kickstart your retirement savings through a retirement annuity, it might be worthwhile to consider multi-asset funds,” Kunene suggested.

2. Optimize savings in the short-term

People who are changing jobs may fear that, once the two-pot system kicks in, a large portion of their retirement savings will be locked in the two-thirds pot. This leads to the question of whether it would be better to withdraw it before the new system comes into effect. 

“While people have different financial circumstances, it would be worthwhile to transfer the funds, where possible, into a preservation fund, as taxes can be quite high if you choose to withdraw any amount above R27,500,” recommended Kunene.

Once the two-pot system is in effect, investors will be able to make withdrawals from the savings pot on a rolling basis every 12 months, which will be taxed at the marginal tax rate.

“Preserving your investment gives your accumulated savings an opportunity to grow. I know this from my personal experience when I changed jobs recently and preserved my pension fund,” said Kunene. 

“This happened in January 2023, and the transfer was finalized the following month, which meant being out of the market for a month.”

Since February 2023 was a “good” month in the market, as the FTSE/JSE ALSI yielded 8.89% in January 2023, Kunene missed out on these returns, he said.

3. Maximize your time in the market and keep an eye on fees 

According to Kunene, “The key advantage of the two-pot system is that people will have access to making provisions for short-term financial emergencies while staying the course in saving for retirement.” 

The proposed amendments stipulate that any accumulated savings until March 2024 will stay in the vested pot and will be accessible based on the rules of the fund that still apply now.

“It makes sense to optimize the growth of that investment by taking advantage of the tax deductions you get when saving through a retirement fund,” he said.

“The government provides a tax-deductible saving of up to 27.5% of your income, which is capped at R350,000 as a rand value before the end of each tax year.”