In less than two weeks, a major policy change to how South Africans save for retirement and cash in on benefits kicks in with the two-pot system, which will, for the first time, allow savers access to a portion of their pension money before they retire.
The change will result in retirement savings being separated into two pots — a savings pot and a retirement pot. A third, vested pot, will contain retirement savings accumulated until August 31, when the old rules stop applying.
A portion of the savings in the vested pot will be transferred to the savings pot (capped at R30,000) — money that will immediately be available for withdrawal. From September 1, one-third of monthly retirement savings will go into the savings pot, while two-thirds will be allocated to the retirement pot.
The two-pot system seeks to allow retirement fund members access to a portion of the savings, with the option to withdraw from the savings pot in case of emergencies. It is aimed at making it possible for people who resign, especially long-serving employees, to access their savings. People can withdraw from the savings pot once every tax year, as long as they keep a minimum of R2,000 saved.
The retirement fund industry expects withdrawals of up to R40bn from various funds when the system goes live in September.
For every retirement fund, retirement annuity and pension fund the new system will create the same rules, so it’s going to get simpler in the long term
— Michelle Acton, Old Mutual
Old Mutual executive for retirement reform Michelle Acton explained the new savings regime.
“If you have R200,000 saved for retirement … 10% — capped at R30,000 — would be transferred as an opening balance into the savings pot.
“So in this example, R20,000 would be allocated to the savings pot, and the balance of the R180,000 would be allocated to the vested pot. In terms of the savings pot, members can access the value in this pot, once per tax year.
“What is taken out of the savings pot will be subject to marginal tax rate linked to Paye tax scales, depending on the amount and your income, ranging between 18% and 45%.”
She said if a member saves R50,000 in their retirement annuity and R200,000 in their pension fund from their company, that means R5,000 will move from their retirement annuity and go into the savings pot of the retirement annuity and R45,000 will remain in their vested pot. Then R20,000 will be allocated to the savings pot under the company-linked fund, and R180,000 will go into the vested pot.
Acton said the funds saved in a member’s retirement fund by September will be allocated straight into their vested pot where the existing rules still apply. That means those who resign from their jobs after September 1 can still access what they have saved in the vested pot.
“Essentially, for every retirement fund, retirement annuity and pension fund the new system will create the same rules, so it’s going to get simpler in the long term. All of them will have a vested pot, retirement pot and savings pot. The new rules of savings and retirement will be the same no matter what fund you’re in.”
She said the new retirement fund system would comprise two systems running parallel for several decades until the old system eventually falls away.
Acton stressed that there was no need to panic or lock in existing savings. “A lot of people are nervous, it’s their savings… One of the most misunderstood things is that the old stuff will still work under the old rules and the new rules will apply to the new savings, except for the initial seeding.”
Under current rules, a member can take one-third of their money in cash when they retire and the remaining two-thirds can be used to buy a pension fund from which they earn a monthly income.
“The one-third that goes into the savings is designed to be your lump sum at retirement. Your retirement pot is designed to be your income at retirement and a member has no access to it before [then].”
While the vested pot would still be governed by the old rules, members would no longer have access to the funds in the retirement pot, to ensure they have some money when they eventually retire.
“The savings pot can now be accessed before retirement, but you will then be borrowing from your lump sum of the future,” Acton said. “The retirement pot gives you assurance. The savings can be touched at times of emergency, but you’re still borrowing from your future.”
Alexforbes executive for solutions and enablement John Anderson said: “From September 3, we anticipate being able to start receiving and processing savings pot withdrawal claims. We will perform the relevant seeding calculations based on individuals’ accumulated balances, validate these, and ensure that they are correctly displayed and set up on our systems to be ready to assist individuals.”
This means from September 3 members will be able to see their retirement fund balances in the new pots and can start putting in claim submissions on the company’s portal to withdraw from their savings pot.
“There are many unknown aspects of operating under the new two-pot system, such as the potential for significant claim volumes brought about through the savings pot and seed capital allocations,” Anderson said.
We didn’t get everything we wanted, but we are happy overall because workers don’t need to resign to access their savings
— Matthew Parks, Cosatu
“As such, we urge all stakeholders to work together to ensure a good experience for members. We also ask members to be patient while we’re becoming familiar with operating in the new two-pot environment.”
The current retirement fund regime allows members to access all their savings as cash lump sums on leaving an employer.
In the two-pot system, two-thirds of contributions will be allocated to the retirement pot, and will not be accessible as a cash lump sum. This must be preserved and annuitised at retirement, Anderson said.
Government Employees Pension Fund spokesperson Matau Molapo said the GEPF was ready to go live in September.
“We have provided detailed information through various channels to ensure that our members are well informed and understand how these changes may impact their retirement savings.”
She said members have the option, but not the obligation, to withdraw up to a third of their savings before retirement. The GEPF would continue educating members about the importance of preserving their savings for retirement, she said.
“Members who choose to withdraw will be provided with clear information on how it will affect their savings and projected future benefits, allowing them to make informed decisions.”
She said one of the key advantages of preserving the retirement pot was that members could safeguard their pension savings for later years, helping them secure a more stable financial future.
Nedgroup Investments senior legal adviser Denver Keswell said the two-pot system helps members preserve benefits until retirement while allowing for some access in times of financial distress.
“We have prepared as best we can considering that the legislation was only enacted in June.”
He said the timing leaves retirement funds with difficult decisions in terms of systems and rules, as most funds will need to make changes when rules go live next month.
“All we can do is to ensure that our members are aware of the adverse effects of early withdrawals on their savings at retirement, as well as tax on withdrawals. It is important for members to talk to financial advisers about these consequences.”
Allan Gray assurance head Richard Carter said it was not clear if the public had been adequately educated about the perils of early withdrawals, or if enough emphasis was being placed on the fact that access to savings is designed only for emergencies.
He said Allan Gray hoped to be able to action withdrawal requests timeously but there could be delays at the South African Revenue Service or other “unforeseen circumstances”, such as an unusually high volume of requests.
Cosatu parliamentary co-ordinator Matthew Parks said while the federation wanted the R30,000 limit to be raised, it was happy that some money would be accessible to workers without them having to resign or approach banks and other lenders when they are in financial distress.
“It’s a negotiated settlement. We didn’t get everything we wanted, but we are happy overall because workers don’t need to resign to access their savings.”
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