Last month, President Cyril Ramaphosa signed a significant legislative change into effect with the passing of the Revenue Laws Amendment Bill of 2023.
This new law introduces what’s been dubbed as a ‘two-pot’ system for retirement funds, set to roll out on 1 September 2024.
Also read: President Cyril Ramaphosa signs two-pot retirement system into law
But what does this mean for individuals planning for their financial future?
The two-pot system aims to address longstanding concerns over the accessibility and preservation of retirement savings. Under this new framework, contributions made after the implementation date will be divided into two distinct components: a savings pot and a retirement pot.
The savings pot will allow members to access funds during times of financial hardship, providing a safety net without the need to completely cash out their pension. Meanwhile, the retirement pot ensures that funds earmarked for retirement remain preserved until needed in later years.
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According to investment management company Allan Gray, this two-pot system intends to promote the preservation of retirement fund investments until members retire while still giving them access to a portion of their accumulated savings during their working years.
All contributions to provident, pension and retirement annuity funds will be split into two components.
One-third of contributions will be allocated to a savings component. This portion can be accessed before retirement in the event of an emergency.
The remaining two-thirds will be allocated to a retirement component. Members will only be able to access this upon retirement. At retirement, this portion must be used to purchase a pension-providing product.
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Moreover, the legislation safeguards vested rights, which refer to the rights individuals already have concerning their existing retirement investments.
Funds accumulated before 1 September 2024, will remain protected, meaning that the rules regarding accessing and taxing these investments will not change.
However, if you were 55 years old or older in March 2021 and a member of a provident fund, you will be excluded from the two-pot system unless you choose to join. This means that all the prior rules remain in place for you and your retirement fund will continue.
If you choose to participate in the two-pot system, your contributions will be allocated to the savings and retirement components from the month after you joined. Your existing benefit will be vested.
Some members of retirement funds will be able to withdraw a small portion of their existing savings immediately once the two-pot system comes into effect. This is commonly referred to as ‘seed capital’.
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However, Insurance group Old Mutual says retirement funds and administrators still have a substantial amount of work to do before they will be able to pay claims, including ensuring administration readiness and integration with SARS.
‘Seeding calculations can only be conducted after the end of August, using the values from that month. The legislation allows for setting calculations after implementation, not necessarily on that date,’ says Michelle Acton, retirement reform executive at Old Mutual.
‘This seeding calculation, which determines the initial amounts to be allocated to different “pots” or accounts based on existing retirement savings, relies on the current amount of savings in each member’s retirement account and their market value.’
‘This process could take several working days to weeks, depending on the rules set by each retirement fund,’ she adds. ‘It is also important to note that only members who have more than R2 000 in their savings pot in September will be able to claim.’
‘Approximately 30% of our members in the Old Mutual stable will have less than R2 000 in their savings pot and will not be able to claim.’
Banking and wealth management group Investec cautions against accessing your savings pot, warning that it will ultimately impact your retirement savings.
‘The ability to access retirement savings for emergencies is an understandable and necessary change for savers,’ says Paul McKeaveney, Investec Investment Management portfolio manager.
‘However, given that most South Africans don’t save enough, savers will be responsible for balancing their short- and long-term needs. This reform will ultimately put more pressure on meeting one’s longer-term goals all things equal.’
‘Therefore, it is important for members to assess their fund balance to see if they will qualify in September.’
Jaya Leibowitz, the manager of Allan Gray’s retail legal team, writes that it is important to remember that the purpose of your retirement investment is to provide you with an income in retirement.
‘While the savings component allows you access, it is prudent to guard against thinking of it as a discretionary savings account,’ she notes.
‘Each time you access a savings withdrawal benefit, the amount available to provide you with an income in retirement will be reduced. In addition, that savings withdrawal benefit will be taxed and has the potential to push you into a higher tax bracket, depending on your income and the value of the withdrawal.’
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