National Assembly passes bill for two-pot retirement system – what is next?

The National Assembly passed the Pension Funds Amendment Bill on Wednesday, the first step to change the pension fund system in South Africa to the two-pot retirement system that will give members access to a small portion of their retirement savings, but even more important ensure that they do not cash out their pensions before retirement, leaving them without sufficient funds to retire comfortably.

The Bill aims to amend the Pension Funds Act to introduce a savings withdrawal benefit and with the Revenue Laws Amendment Bill will establish the two-pot retirement system that will come into effect on 1 September this year to support long-term retirement savings while offering flexibility to help fund members in financial distress.

According to National Treasury, retirement funds are often the only savings that fund members have and under the current system some members resign to access their retirement fund savings to pay off debt, which is detrimental from an economic, financial planning and retirement provision point of view.

The National Assembly passed the Revenue Laws Amendment Bill on 20 February. The president must now sign the bills into law. Pension funds and their administrators have already started to apply for rule amendments with the Financial Sector Conduct Authority (FSCA) and change their systems to implement the two-pot retirement system. They also have to ensure that they educate their members on how savings withdrawal claims will be processed.

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Government moving quickly thanks to election coming up

Michelle Acton, retirement reform executive at Old Mutual, says government is moving quite quickly to get the two-pot retirement system implemented, probably thanks to the upcoming election.

“It is good to see that it is moving quickly, as it will be a massive change to the pension system in South Africa and bring us in line with other countries.”

Although members are mainly concerned with having the two-pot retirement system implemented as soon as possible because they want access to their funds, Acton says the main reason to be excited about the coming implementation is that it will ensure that people preserve their retirement funds until they retire and not resign to get access to their retirement savings.

Acton says according to Old Mutual statistics more than 90% of retirement fund members exercise the option to withdraw all of their retirement savings when they change jobs instead of transferring the money to a preservation fund, a new fund or just leaving it invested with the original fund.

While she says she believes that Old Mutual will be ready by 1 September and has already submitted its rules to the FSCA, she points out that pension fund members do not understand the two-pot retirement system at all and therefore a lot of work still needs to be done to ensure that they do over the next five months.

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Misconceptions about the two-pot retirement system

“Members still believe that they will have access to a third of their pension fund savings, instead of only 10% capped at R30 000. They also believe that they will have access to the full amount, but they will have to pay tax on the amount as well as administration fees.”

She gives an example where someone withdraws the R30 000 seed capital but has outstanding tax debt of R7 000. If you have a tax rate of 25%, the tax on the withdrawal will be R7 500. This leaves you with R22 500 and minus the R7 000 tax debt, your payout will be only R15 500.

Members are also under the impression that they will be able to push a button on 1 September and have immediate access to their money, but Acton says it is not that simple.

“The two-pot retirement system will only be effective from 1 September when we can start to implement our systems and do the calculations. The law does not say that payments will happen on 1 September.”

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Important points to remember

Acton says there are three things members must remember:

• Do not panic about your current pension fund savings as people did in 2014 and 2015, when members of the South African Police Service and teachers in particular resigned to withdraw their pension contributions, wrongly believing that from 1 March 2015 government would no longer allow civil servants the option of a cash lump sum when they retire.
• From the value of your fund on 31 August 2024, 10% or R30 000, whichever is lower, will be allocated to the savings component as seeding capital. This will be a once-off transfer at the start of the two-pot system and will not be repeated in the following years.
• You will not be able to make a withdrawal on 1 September. It will take a week or two for all the systems to come online before members can access their funds.

Acton says members’ eagerness to access their funds shows how desperate people are for extra money during the current cost-of-living crisis, but it also shows their lack of financial literacy.

“People do not think of the future and they also overestimate how much money they have saved for retirement.”

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Answers to questions about the two-pot retirement system

She also answered some questions from readers of The Citizen about the two-pot retirement system:

• What will happen to all the contributions that were saved before the new system comes into effect? “Any balance in the fund on 31 August 2024 will be allocated to what is called a “Vested Component”.  From this Vested Component, 10%, capped at R30 000, will be transferred as an opening balance in the Savings Component. All current rules will still apply to the Vested Component. This means members have no reason to panic as vested rights are protected.
• What does it mean by future contribution, what about current contributions? “Current contributions are included in your current fund balance which will be allocated to your Vested Component, including all contributions before 1 September 2024.  Future contributions will be allocated to the new components, but they all are still within the same Retirement Fund.
• What will happen to individuals who have their own retirement funds already and how will those funds be affected? “The two-pot retirement system will apply automatically to all retirement funds. If a member has existing savings in an existing fund, these rules will apply to them. All future contributions will be split between a third in the Savings Component and two thirds in the Retirement Component. It should have no impact on the value of the funds as it is only an “allocation within the same retirement fund”. Into the future the Total Retirement Benefit in a Fund = Vested Component + Savings Component + Retirement Component.
• Will the system be open to corruption? “The retirement fund industry is a very well regulated industry and we do not feel that these changes will increase risk in terms of corruption.“

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What happens next?

Now that the two bills required for the two-pot retirement system to go ahead have been passed, it is also important for the South African Revenue Services (Sars) to get its systems ready to handle the tax component of the payouts, Acton says. “If Sars is not ready, we will not be able to pay out.”

Sars will announce its preliminary revenue on Tuesday and will, hopefully, give an indication of its readiness for the two-pot retirement system then.