The two-pot system is a significant milestone in retirement reforms that have taken place over the last decade. It enhances our retirement system, which we expect to improve retirement outcomes for members.
The COVID pandemic was the catalyst for the two-pot system. Members were requesting access to retirement savings while still employed to assist with financial relief.
The two-pot system is a more sustainable regime into the future, which better aligns to the main purpose and objective of a retirement fund. It also provides a practical way for members to balance their competing financial needs for longer-term financial security and short-term financial relief.
What the two-pot system sets out to achieve
The main objective is to improve members’ retirement outcomes by requiring increased preservation before retirement. These retirement reforms are important because our insights and data analysis show that only about 6% of members can expect a replacement ratio of 75% or more of pensionable salary. This is mainly due to 91% of members taking cash withdrawals when changing jobs. Considering various assumptions, the two-pot system is likely to improve new members’ retirement outcomes by 2 to 2,5 times compared to those under the current system.
The system ultimately provides better retirement outcomes while assisting members with financial relief when they have no other options.
Effective date for the two-pot system
On 4 December 2023 the Standing Committee on Finance (SCOF) met to discuss the Finance Minister’s letter which requested that the effective date for the two-pot system be changed to 1 September 2024 for the following reasons:
- Pension Funds Act changes are needed.
- Retirement fund rules need to be amended.
- Retirement funds such as the GEPF that are not regulated by the Pension Funds Act need legislative changes.
- SARS requested more time to get their processes and systems ready to tax withdrawal claims from the savings component.
- Liquidity must be managed in investment portfolios.
- Members need comprehensive education and communication.
Our understanding is that SCOF supported and accepted the Minister’s proposed effective date of 1 September 2024. However, final parliamentary approval and final legislation are needed as part of the process. This means that the new proposed effective date is not yet final.
How the two-pot system works
Key changes that the two-pot system introduces:
- From the effective date two-thirds (about 67%) of new retirement fund contributions will be automatically allocated to a retirement component. These savings, and any investment growth, must be kept invested until retirement and used to set up a retirement income (be annuitised) at retirement.
- From the effective date one-third (about 33%) of new retirement fund contributions will automatically be allocated to a savings component. These savings, and any investment growth, can be withdrawn once in a tax year by members, provided the amount withdrawn is not less than R2 000. They can do this without having to leave their job or retire. Members can also keep this invested and withdraw it or use it to set up a retirement income at retirement. Tax at marginal rates applies to any amounts withdrawn from the savings component before retirement.
- Any amounts saved just before the effective date, and any past or future investment growth, will be automatically allocated to a vested component. This is to safeguard existing rights under the current laws.
- Members of occupational retirement funds will still be able to withdraw these savings in cash if they leave their jobs or retire according to rules that apply before the two-pot system is implemented.
- For members of preservation funds the one withdrawal rule will still apply to these savings before retirement.
- Members of retirement annuity funds will not be able to withdraw these savings before retirement, as they can only withdraw up to one-third at retirement.
- Tax applies to all cash withdrawals from the vested component.
- Members will have limited access to their retirement savings they have just before the effective date without resigning from their employer. This is known as ‘seed capital’ and is proposed to be limited to 10% of retirement savings just before the effective date but not more than R30 000. This amount reduces the vested component and will be transferred to the savings component as the starting balance. Tax will also apply to this amount if it is withdrawn.
- Provident fund members who were 55 or older on 1 March 2021 will be able to opt in to the two-pot system. In other words, the two-pot system will not automatically apply to these members, as they will have a choice.
How Alexforbes is preparing for the two-pot system
It is possible that final legislation will only be available in early 2024. We are also waiting for the proposed changes to the Pension Funds Act that are required to support the two-pot changes in the tax laws. We are engaging with National Treasury, FSCA, SARS and industry bodies throughout the process.
Alexforbes has been diligently working on implementation plans based on draft legislation. However, our progress is contingent on the final legislation, which is still unavailable. This limitation prevents us from making final changes and updates to our communication efforts, systems and processes. These reforms represent significant changes to the retirement system, with substantial implementation requirements. Therefore it is crucial to allow a reasonable time between the finalisation of the legislation and the effective date of these changes. This will enable all stakeholders in the industry to ensure a smooth transition that works well for retirement fund members. As custodians of our clients’ retirement savings, we hold a responsibility to manage their money diligently and responsibly.
Our approach to implementation is to ensure the right outcomes for members within a safe and secure environment. It’s important for all stakeholders to work together to ensure everything is in place to assist members within reasonable timelines.
We believe that the new proposed effective date of 1 September 2024 provides a good compromise based on the unfolding parliamentary and legislative process.
Alexforbes welcomes the two-pot system changes and is looking forward to how this will shape the industry over time and provide additional value and enhanced benefits to members of retirement funds.
Author
Vickie Lange, Head: Best Practice at Alexforbes
