South Africa’s retirement savings landscape is poised for a major transformation with the introduction of the new two-pot retirement system on 1 September 2024. Shaheed Mohamed, head of group savings and investments at Allan Gray, delves into these critical changes.
The upcoming two-pot system is designed to enhance retirement outcomes by ensuring that at least two-thirds of a member’s future retirement savings are preserved until retirement. At the same time, it allows members to access a portion of their savings once per tax year if they encounter financial distress.
Shaheed believes that providing some level of access to funds will help alleviate the extreme measures some members currently take to access their retirement savings.
“We have seen numerous instances where cash-strapped members resign from their employment just to access the funds in their pension or provident funds. This is detrimental because it often leaves them without work for a period as they seek new employment, and any assets that are withdrawn and not replaced before retirement will reduce income in retirement. Additionally, this is disruptive for employers, who then need to source and train new staff, incurring costs.”
Shaheed adds that the new system should help prevent these scenarios, benefiting members, employers, and the overall retirement savings rate in South Africa over the long term. “While the ability to access funds in emergencies will provide relief to some members, the long-term success of the new system relies on most members refraining from unnecessary withdrawals.”
How will it work?
Starting 1 September 2024, new contributions to provident, pension, umbrella and retirement annuity funds, and transfers to preservation funds will be divided into two components (i.e., the two “pots”). One-third of new contributions will go into a savings component, accessible before retirement in case of emergencies. The remaining two-thirds will go into a retirement component, which will be inaccessible until retirement and must be used to purchase a retirement income product.
Shaheed emphasises that members will retain their existing retirement rights on all contributions made before 1 September and growth thereon. “The value of a member’s current retirement fund as of the end of August 2024 will remain invested and be allocated to the ‘vested’ component. All existing rights will continue to apply to this component. Additionally, 10 percent of the vested component, up to a maximum of R30,000, will be transferred from the vested component to “seed” the member’s savings pot on 1 September. Seeding is a once-off event.”
What are the implications of withdrawing from the savings component?
While the two-pot system offers relief for members facing financial hardship, Shaheed cautions about the consequences of withdrawals. “Accessing any part of the savings component before retirement will reduce the amount available at retirement for purchasing a retirement income product or to take as a cash lump sum. Additionally, withdrawals before retirement will be taxed at the member's marginal tax rate. Outstanding taxes due to SARS will also be deducted and members will receive the after-tax amount in their bank account.”
What is the role of the employer?
Shaheed advises that employers must prepare their staff for the new system. “As custodians of staff’s retirement fund benefits, it is crucial for employers to educate their staff about the new system. Management should involve the retirement fund consultant or product provider to inform their members about the pros and cons of the new system, especially the implications of withdrawing. This ensures members make well-informed decisions,” he explains.
“Employers should understand the withdrawal process with the product provider, as they could face a surge of withdrawal requests from staff come 1 September. To alleviate the administrative burden on employers, at Allan Gray we are guiding members to submit withdrawal instructions via their secure online account. This will hopefully also mitigate fraudulent activity, which is more common with paper-based instructions. With the anticipated rise in withdrawal activity, there is an increased risk of fraudsters targeting unsuspecting members. Employers should warn their staff to be vigilant.”
Shaheed stresses the importance of employers understanding and communicating any additional fees under the new two-pot system, as some providers will levy fees. “We have decided not to charge an implementation fee nor a member withdrawal fee on our Umbrella Retirement Funds at the outset – we will monitor activity for a period and make decisions based on data and experience.”
