South African retirement fund fee warning 

South Africa’s largest asset managers are set to earn billions in fees as individuals withdraw some of their savings under the new two-pot system. 

These companies are also set to win in the long term as the forced savings component, the retirement ‘pot, will result in more funds staying invested until retirement, potentially boosting their assets under management. 

This could result in these companies earning much more in management fees over the longer term as more money stays invested in their funds. 

The new two-pot retirement system came into effect on 1 September and has created widespread concern that early withdrawals from its savings ‘pot’ will negatively impact outcomes in retirement. 

Another significant concern is the lack of knowledge surrounding how much tax individuals will pay upon withdrawing from the savings pot. 

In short, the two-pot system will result in all future contributions to retirement or pension funds being split in two –

• 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 necessary. 

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. 

There will also be a third pot (the vested pot) that will contain members’ existing retirement savings as of the end of August 2024. The rules will be the same as under the current retirement system. 

One overlooked aspect of the new two-pot system is the significant fees asset managers charge for withdrawals from the savings ‘pot’. 

Consulting actuaries at Keystone Actuarial Solutions, Howard Buck and Grant Base, said asset managers have hiked their fees for withdrawals under the pretence of it being a significant administrative change for them. 

Most of the administrators have, therefore, decided to charge an additional fee for savings pot withdrawals and the additional administration costs of the two-pot system. 

These costs include maintaining separate records of each pot and changes to communication, such as benefits statements. 

To cover these additional costs, many asset managers have decided to charge a fee against each savings pot withdrawal, increase the basic administration fee or a combination of the two.

Buck and Base conducted a survey of medium to large retirement fund administrators to compare the fees they charge for withdrawals from the savings pot. 

The survey found that most administrators charge a flat fee regardless of the withdrawal amount, with only two charging a variable fee depending on the amount withdrawn. 

Three administrators have also explicitly confirmed that they will increase their base administration fee by between 2.80% and 4.00% from 1 September 2024 due to the new system. 

Others said they would not increase fees immediately from 1 September but may increase their administration fees in future once the number of savings pot withdrawals is known. 

The fees asset managers said they would charge are shown in the table below, courtesy of Buck and Base. 

This might appear to be a case of short-term gain and long-term pain for asset managers as they will receive billions in fees from early withdrawals but lose out on additional management fees in future as assets under management decline. 

However, this will not be the case as the two-pot system incorporates a form of forced savings through the retirement pot. 

South Africans will not be able to withdraw from this pot until retirement, upon which it must be used to purchase a retirement income product. 

This will result in a greater share of funds remaining invested in retirement funds than under the previous system. 

Under the old system, the only way South Africans could get their hands on their retirement savings was to resign or be retrenched. This created very poor outcomes for many in retirement. 

Between 2011 and 2020, over 6.1 million people opted for early pension fund withdrawal, with an average of around 700,000 withdrawals every year since 2016.

Higher tax rates on early withdrawals were simply not enough to discourage South Africans from getting their hands on their retirement savings prematurely. 

These taxes are a goldmine for the government, generating around R12 billion a year – more than the tax collected upon retirement. 

The growing amount of withdrawals reduces the amount available for employees on retirement, something that the two-pot system aims to address. 

Thus, the new system should result in a greater share of funds remaining invested until retirement, minimising the effect of withdrawals on assets under management.