Old Mutual warns about new pension fund rules myths

South Africa’s new two-pot retirement system, which will be implemented in September, has been the subject of much misinformation about its operation.

President Cyril Ramaphosa signed the Revenue Laws Amendment Bill of 2023 into law at the start of June, establishing a “two-pot” retirement system.

This new system gives members of retirement funds access to retirement savings without having to resign or cash out entire pension funds.

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.

According to IRFA President Geraldine Fowler, the “two-pot” system allows retirement fund members to think more about their retirement savings.

“This system provides flexibility for fund members that was not available in the past. Members will now need to engage with their retirement funds more often and consider the long-term impact and the taxation of benefits.”

“Members will need information and guidance to better understand their options in terms of the two-pot system, as well as the impact of their decisions in taking advantage of the legislation,” Fowler said

Hiller van Rensburg notes, “We are, however, waiting for the Pensions Bill and look forward to its signature, which is necessary for full clarity but not necessary for the implementation of this reform.”

Old Mutual explains that while there are many misconceptions regarding the two-pot retirement system, we do have clarity on most of the finer details.

Below is a list of some common myths surrounding the system.

Myth 1: I’ll have access to all my retirement savings.

“When the Two-Pot Retirement System goes into effect, retirement fund members will only have access to the money that’s in the Savings Component,” said Old Mutual.

“This is a new system, so to make sure you’re not starting from zero, 10% of your existing retirement savings (up to a maximum of R30 000) will be moved into that Savings Component (or “pot”).”

“This transfer will only happen once. Going forward, your Savings Component will be funded by the allocation of one-third of your total ongoing fund contributions.”

Myth 2: My retirement savings will disappear when the Two-Pot Retirement System kicks in.

“There’s no need to panic. Your existing retirement savings will be fully protected and will stay exactly as and where they are in your current retirement fund,” said Old Mutual.

“The Two-Pot Retirement System’s rules will only apply to your future retirement contributions, starting on the effective date.”

Myth 3: Only employee contributions go into the accessible pot.

“The Two-Pot Retirement reforms will apply to all contributions to your fund, so it will apply to both employee and employer contributions.”

Myth 4: I can withdraw from all my pots when I quit my job.

The Two-Pot Retirement System introduces mandatory preservation.

“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.

Old Mutual explains, “Under the old/current system, you could access all your retirement savings if you resigned or were dismissed or retrenched.”

“Under the Two-Pot Retirement System, you can only access your existing (the balance as at the effective date) and Savings (subject to accessibility rules) Components when you leave your job before retirement.”

Myth 5: I can access my retirement savings to enhance my lifestyle.

According to Old Mutual, “early access to your retirement savings is the exact opposite of the real intention of the Two-Pot Retirement System.”

“Early access will only be granted once a year, and it should only be accessed for emergencies.”

“It’s not intended for lifestyle enhancements – which is why you’ll be taxed your marginal rate of tax on any withdrawals from the Savings Component.”

Old Mutual notes that it is “really important to understand that withdrawing funds now will impact your retirement savings plan and could lead to you having far less when you’re ready to retire.”

“That’s why we’re recommending that you chat to your adviser first so that you can better understand the impact of withdrawing, and that you only withdraw if you need the money for an emergency.”

Myth 6: I won’t pay tax on withdrawals from my Savings Component.

Any withdrawals made from your Savings Component will be taxed at your normal marginal rate of income tax rate.

Myth 7: I can replace the money I withdraw from my Savings Pot as soon as I’m financially stable again.

“Your retirement savings are neither designed nor intended to be transactional savings accounts. No money that you withdraw from your Savings Component can be directly replaced at a later point.”

“The only way to replace that money is by increasing your future contributions over time or once-off voluntary contributions, which would not be directly allocated to the Savings Pot,” said Old Mutual.

“Only one-third of the amount would go to the Savings Pot and the other two-thirds would go to the Retirement Pot.”

Myth 8: I will need to elect to join the Two-Pot Retirement System.

“The move to the proposed Two-Pot Retirement System will be automatic for all retirement fund members, so no action is required.”

Members who were older than 55 on 1 March 2021 will be the only exception and will be given an option to opt in.