Retirement fund warning from Allan Gray 

Richard Carter, head of assurance at Allan Gray, warned South Africans not to view the savings component of their retirement funds as a slush fund as this would severely impact financial outcomes after their working career. 

Earlier this week, President Ramaphosa signed the Pension Funds Amendment Act into law, establishing the two-pot retirement system that gives members early access to some of their savings. 

The act requires pension funds to amend their rules, adjust their investment portfolios, and prepare administrative systems for pension-fund members to apply for access to portions of their pension funds from 1 September.

This is the most substantial change to South Africa’s retirement system since 1994. Members can now withdraw funds from their savings pot once a year. 

The new legislation mandates that all future contributions to retirement funds be divided into two sections –

• Two-thirds of each contribution will go into a retirement component, which must remain untouched until retirement.
• The remaining one-third will be directed into a savings component, which allows for one withdrawal per tax year before retirement.

Additionally, a separate ‘pot’ will be created for individuals with existing retirement funds to retain the value of all contributions made before the new system’s start date of 1 September.

While the savings component is designed to be accessed as a lump sum upon retirement, members can withdraw up to 100% of their savings component once per year before retirement. The minimum withdrawal amount is currently set at R2,000.

The National Treasury said in April it expects savers to withdraw about R28 billion from their pension funds once the system revamp is implemented.

Carter reminded investors that the new system aims to improve retirement outcomes by enhancing the preservation of funds until maturity. 

While the new legislation does offer some flexibility by enabling access to cash from the savings component, this should only be used in emergencies. 

“We are gearing up for the changes we need to make and will be able to service those clients who want to access a portion of their retirement savings, as per the new laws,” he said.

“However, for anyone uncertain about what to do next, in most cases, you don’t need to do anything.”

The new system should not change how investors think about or invest their retirement savings and should not affect long-term retirement savings goals.

“Guard against viewing your savings component as a slush fund for consumption; depleting it annually equates to using up one-third of your retirement investment,” Carter said. 

“Not electing to withdraw, but rather choosing to stay the course for the long term, will result in better retirement outcomes.” 

Early withdrawals under the new two-pot system will negatively impact retirement income and have significant tax implications. 

Allan Gray’s retail legal team manager, Jaya Leibowitz, warned that any withdrawal will be included in the individual’s gross income for the tax year. 

This means the amount withdrawn will be taxed at their personal income tax rate and may even bump individuals into a higher tax bracket. 

“It is important to understand that because it is included in gross income, the withdrawal amount could push you into a higher tax bracket,” she warned. 

This aims to discourage individuals from accessing a savings withdrawal benefit when they have other sources of income and don’t need to dip into their retirement fund savings.

“Wherever possible, retirement fund members should avoid accessing their savings withdrawal benefit,” Leibowitz said.

Sanlam’s consulting actuary, Ryan Campbell-Harris, calculated that nearly half of the withdrawal amount can be eaten up by taxes and transaction fees. 

He gave an example of someone who withdraws R10,000 from their retirement fund under the new two-pot system. 

Assuming this individual earns between R370,000 and R512,000 a year and is taxed at a marginal rate of 31%, they will lose nearly half of the withdrawal amount to tax and transaction fees. 

This member will receive only R6,762 of the R10,000 withdrawal. R200 will go to the transaction fee, and the rest will be lost to tax.