By: Linda Kleynscheldt
The road to September 1, 2024 – the implementation date of the new two-pot retirement system regulation – has been long and winding. But we have finally arrived at the point where the proposals, discussions, and all the pot analogies and memes have ended, and the system has become a reality.
Three pots, or two?
Under the new system, saving for retirement from your pre-tax salary will be split into savings that can be accessed before retirement (referred to as the ‘savings pot’), and savings that cannot be accessed before retirement (called the ‘retirement pot’). Let us keep this principle in mind before going into the exceptions and the third pot, referred to as the ‘vested pot’.
The vested pot came about to allow for the government’s goal to keep the management and accessibility of retirement funds accrued to date unchanged. All funds saved in retirement products up to 1 September 2024 will retain the same accessibility and tax treatment as before the legislation took effect. The only impact of the two-pot system on accrued retirement savings is that an amount of 10% from the vested pot (up to a maximum of R30 000) has been used to pre-fund the savings pot so that all policyholders will be able to benefit from the new system from the start.
With great freedom, comes great responsibility… and complexity
While we know that with freedom comes responsibility, the two-pot retirement system has shown us that with flexibility comes complexity. For new retirement savings plans, the two-pot retirement system should bring a good balance between protecting savings for the future and giving some relief should life take an unexpected turn. In such cases, an annual withdrawal from the savings pot can come to the rescue of retirement fund members who require access to their savings.
However, for existing retirement fund members, it might take some time to fully understand and get comfortable with the different rules now applicable to their savings, with vested savings continuing on old rules and new savings on new rules. Add onto that the exception that pension and provident fund members aged 55 and older when the previous change came into effect in 2021 could opt to retain their current status or move onto the new system.
All of this has highlighted the significant value financial advisers bring to the industry and how they can help investors navigate the maze of rules and options available.
The good, the bad and the ugly
The two-pot retirement system is trying to find the right balance of providing for the future through compulsory preservation while addressing the concerns and realities of South Africa’s socio-economic environment through access to savings. Unfortunately, the added complexity and the fact that accessing your savings is a loan against yourself (and your future self as a retiree) are real concerns.
In the first week of accessibility, the South African Revenue Service (Sars) said that two-pot claims rose to around R4 billion, and it had received 161 607 tax directive applications from retirement fund administrators between 1 September and 10 September.
Even if contributors view accessing retirement savings as a temporary loan, it may not always be possible to replenish their savings, potentially reducing the already low percentage of South Africans retiring comfortably.
Different tax treatments on withdrawals in the old and new regimes will also take some time to get used to and should be taken into consideration before deciding to withdraw from your savings pot. For PSG clients, withdrawals have been negligible, demonstrating that our higher-income earner client base is committed to their long-term investment goals.
* Kleynscheldt is the head of actuarial and product, PSG Wealth.
PERSONAL FINANCE