Allan Gray retirement fund warning

South Africa’s new two-pot retirement system aims to improve financial outcomes in retirement. However, this is only if the new rules are used as intended and not as a slush fund for immediate purchases. 

This is feedback from the head of Allan Gray’s product development team, Shaun Duddy, who outlined the seemingly innocuous missteps individuals may make under the new two-pot system. 

These missteps may seem harmless, but they have the potential to significantly impact the quality of retirement for many South Africans and offset much of the new system’s good intentions. 

While Allan Gray believes the new rules are a positive step for South Africa’s retirement system and will largely benefit savers and asset managers, questions remain. 

“Whether they actually assist retirement fund members in achieving a better retirement will still come down to individuals making good decisions and avoiding the risks that exist within the framework of the new rules,” Duddy said. 

From 1 September 2024, all new retirement fund contributions will be split into two components or ‘pots’ – 

• Two-thirds of every contribution goes into a retirement component. The assets in this component cannot be accessed before retirement. At maturity, these must be used to purchase a retirement income product, such as a living annuity or guaranteed life annuity.
• One-third of every contribution goes into a savings component. As contributions to a retirement fund, the assets in this component should also remain invested until retirement to provide you with income. However, this component also provides the option to make one withdrawal (of R2,000 or more) per tax year before retirement if you need to. This access is designed to help you in case of emergencies. You also have the option to access these assets as a cash lump sum at retirement. 

Your existing retirement fund assets will be allocated to a third pot, and the current rules will continue to apply. Ten per cent of the assets you hold on 31 August, up to a maximum of R30,000, will be allocated to your savings component on 1 September to provide an opening balance. 

The balance of your existing assets will remain in your vested component, and nothing will change for these assets.

Duddy warned savers that just because they can withdraw money from their savings pot does not mean they should. 

These withdrawals will be heavily taxed at the individual’s marginal rate, and administrative fees will be levied, significantly reducing the cash you get out. 

More importantly, this will also interrupt the compounding process and negatively impact financial outcomes in retirement. 

The graph below shows three different scenarios and their subsequent impact on retirement funds. In all scenarios, the savings are invested in Allan Gray’s balanced fund. 

• In Scenario 1 (the light grey line), they take all of their retirement fund assets when they change employers at the end of year five and again at the end of year 15, which is allowable under the current rules. 
• Scenario 2 (the dark grey line) assumes that the new rules apply: One-third of each contribution (R2,000) is allocated to a savings component, two-thirds of each contribution (R4,000) is allocated to a retirement component, and only the full savings component is taken each and every year. 
• Scenario 3 (the red line) assumes that nothing is taken when changing employers. 

After 20 years, relative to Scenario 1, the member would have 6.3 times more in Scenario 2 and 9.5 times more in Scenario 3. This illustrates the power of preservation and how the new rules can improve preservation in pension and provident funds.