Two-pot retirement system: don't just focus on the cash

Laura du Preez | 25 April 2024

Laura du Preez has been writing about personal finance topics for more than 20 years, including eight years as personal finance editor for two leading media houses.

Many retirement fund members are anchoring on the money they will be able to access when the two-pot retirement system is implemented in September without appreciating the implications of raiding their savings, retirement fund industry leaders cautioned the Pension Lawyers Conference last week.

The two-pot system, which is due to come into effect on September 1, will divide your future retirement savings into two pots. One third of your future retirement savings will be accessible in a savings pot and the other two thirds must be preserved until retirement.

The savings pot will be seeded with some of your existing savings which is also confusing members, and many may be disappointed to find they cannot access as much as they think they can.


You may not qualify for a withdrawal

John Anderson, executive for Solutions & Enablement at AlexForbes, told the conference that an analysis of the retirement savings administered by AlexForbes, showed a large proportion of members will not be able to access any money in their retirement fund on September 1.

This is because withdrawals can only be made if you have at least R2 000 in your savings pot to withdraw. As the savings pot will be seeded with 10 percent of your retirement savings on August 31 this year up to a maximum of R30 000, you need at least R20 000 of savings on that date in order to be able to withdraw.

Anderson said some members mistakenly think they will be able to withdraw R30 000. Only members with R300 000 saved will be able to get the maximum of R30 000 after September this year.


Weigh up short vs long term needs

Blessing Utete, the managing executive of Old Mutual Corporate Consultants, said members are anchoring on the cash they can get instead of regarding the new system as introducing savings you can tap into as a last resort in an emergency.

These savings should not be regarded as your first port of call when you need money, because when you tap into them you are borrowing from your future self, Utete said.

Anderson said members who believe they need access to their retirement savings should get financial advice or retirement benefits counselling to help them think through balancing their short-term needs to, for example, settle debt, against their long-term need to provide for their future.

Members should take advice on whether it is a good idea to take their savings because we are all different. In some cases it will make sense to take the money, while in others it will not because of the tax, the impact on your future retirement income or because you are accessing the money for the wrong reasons, Anderson said.

He said if you are over-indebted but can only withdraw R2 000 less tax, it may not be worth compromising your retirement savings. You may be better off consolidating your debt or going under debt review. 

Free retirement benefits counselling offered by retirement funds can help you decide what to do to best achieve your financial goals, he said.

Itai Mukadira, actuarial specialist at the Metal Industries Benefit Funds Administrators, said it may be very exciting to cash out your retirement savings now but you will live with the consequences in the future when you will probably not have enough to live on in retirement. Older members, in particular, may not have time to replace those savings before they retire, he said.

Most retirement funds are set up to ensure you receive a pension of 60 to 75 percent of your final salary as long as you contribute throughout your working life and do not make any withdrawals.

Accessing money in your savings pot from September will reduce your pension below the targeted 60 to 75 percent of your final salary and more so if you have accessed, or will access in future, your vested savings (made before September 1 this year).

Brenda Penny, the managing director of Verso Trustee Services, said many retirement fund members do not understand compound interest and the power it has to grow your retirement savings. Withdrawing from the savings pot not only denies you what you draw but also the tax-free compounded growth on that money you could have earned until you retire.


The need for advice

Older provident fund members should seek financial advice on what they should do when the two-pot system is introduced.

Leanne van Wyk, a director of ICTS Legal Services, said provident fund members who were 55 years of age or older on March 1 2021 will by default be excluded from the two-pot retirement system.

This means they will not get access to any of their savings now, they will continue to save as they are now and, at retirement, they will be able to take all their retirement savings in cash.

If they want access to their savings now, they will have to opt into the new retirement system before September 1, 2025. It is a once-off selection that cannot be reversed, Van Wyk said.

Provident fund members close to retirement should take advice on whether to opt in or stay out of the new system and make sure they understand all the implications of taking cash now versus getting all their savings in cash later, she says.


Tax on savings withdrawals

Members are focussing on the 10 percent up to R30 000 they will be able to access forgetting that tax and administration costs will be deducted from whatever you withdraw under the two-pot system.

Whatever you withdraw will be added to your taxable income in the tax year in which you receive it and taxed at the marginal tax rate that applies to your income bracket, Van Wyk said.

In the Budget, National Treasury said the South African Revenue Service was expecting to get R5 billion in tax on withdrawals from retirement funds this tax year.

Rowan Burger, head of strategic advice at Momentum-Metropolitan, said he expects the withdrawals will give SARS a lot more in tax than the R5 billion they have pencilled in.

Your savings to date will not be tied up

Mukadira said there are retirement fund members who believe that when the two-pot system is implemented they will not get access to their money again. They are misinformed and believe they should resign and cash out what they have saved to date.

It is not necessary to give up your job – your savings to date in your vested pot will be available for you to withdraw if you resign from your job at any time in the future.

It is only two thirds of the future contributions you make that will be put into a retirement pot that you can only access at retirement.  

Speakers at the conference concluded that misinformation was a challenge and members should make the effort to attend educational sessions, read communication from their funds and get counselling or advice if they want to withdraw.