Marc Wiese, MD of Warwick Wealth
According to National Treasury, less than 6% of South Africans retire comfortably, largely due to economic and social factors, with many cashing out their pension funds when changing jobs. The new Two Pot system aims to mitigate this issue by reducing the incentive for individuals to resign from their employment to access their full pension, potentially leading to better retirement outcomes in the long run.
The new Two Pot system introduced by National Treasury, aims to enhance retirement outcomes while providing members of pension funds or retirement annuities with limited access to their retirement savings before reaching retirement age. This system allows members to access a portion of their accumulated funds for immediate needs, while preserving the remaining assets for future retirement. By implementing this approach, the government seeks to strike a balance between meeting short-term financial obligations and ensuring adequate retirement savings. The ultimate goal is to improve overall retirement outcomes by enabling members to access a portion of their funds without the need to resign from their employment. This promotes financial flexibility and security.
The introduction of the new structure, often referred to as the Three Component Structure or the Two Pot system, will significantly impact members’ current retirement savings. All retirement savings accumulated up to August 31, 2024, will be classified as the ‘Vested Component’. From September 1, new contributions will be divided into two distinct components: one-third will be allocated to a ‘Savings Component’, while two-thirds will go to a ‘Retirement Component’. Each of these components will have its own set of rules and regulations, creating a more structured approach to managing retirement savings and offering members greater clarity on how their funds are allocated and utilised.
The rules and regulations governing the components of the new retirement savings structure are as follows: The Vested Component encompasses all retirement contributions made up to August 31, 2024, and these assets will adhere to the same access rules that were in place prior to this date. Importantly, no new contributions will be permitted to this component from September 1, 2024.. For the Vested Component of retirement annuities (RAs), members can access their funds starting at age 55, allowing for the withdrawal of one-third of the accumulated value, while the remaining two-thirds must be allocated to purchase a life or living annuity, which provides access to between 2.5% and 17.5% per annum. In contrast, members of pension and provident funds can fully withdraw their Vested Component upon resignation or termination of employment. Additionally, it is essential to note that none of the assets within the Vested Component can be transferred to another component, ensuring that these funds remain distinct and subject to their specific regulations.
The Savings Component, which consists of one-third of all new retirement contributions made from September 1 onward, is designed to offer members limited annual access to their funds. To establish this component on September 1, all retirement annuities (RAs) and pension funds will allocate the lesser of 10% of the member’s Vested Component or R30,000 to the Savings Component. Members will be allowed to make one withdrawal per tax year from this component, with the annual withdrawal amount ranging from a minimum of R2,000 to a maximum of 100% of the value of the Savings Component. It is important to note that any withdrawals made will be considered part of the member’s taxable income and will be taxed at their marginal tax rate, ensuring that investors are aware of the tax implications associated with accessing their savings.
The Retirement Component, which comprises of two-thirds of all new contributions made from September 1 onward, is designed to provide long-term retirement savings. Unlike past pension funds and retirement annuities (RAs), this component cannot be accessed before retirement, and a significant distinction of this new structure is that members will not have access to these funds upon resignation or termination of employment. Upon reaching retirement, investors have the option to transfer their Vested and/or Savings Components into the Retirement Component; however, it is important to note that funds within the Retirement Component cannot be transferred back to the Vested or Savings Components. This structure emphasises the importance of preserving retirement savings for their intended purpose, ensuring that members have adequate resources when they retire.
The impact of the new retirement savings structure on future savings can be viewed as both positive and negative, depending on individual circumstances and financial plans. For many South Africans, the ability to access a portion of their retirement savings in emergencies is a positive feature by providing a safety net. However, there is a significant risk that individuals may withdraw from this new ‘rainy day’ fund for day-to-day living expenses or non-essential luxuries, which could substantially erode their future retirement capital.
Note, that it is crucial to understand the differences between pension funds and retirement annuities (RAs); pension funds are typically linked to employment as part of an employee benefits package, while RAs are individually owned and not tied to employment. In terms of flexibility, pension funds allow access upon resignation, retrenchment, or dismissal, whereas RAs can only be fully accessed after the age of 55. Unfortunately, some individuals have resigned from their jobs solely to access their pension funds for short-term cash flow, resulting in significantly reduced retirement assets.
While the new Two Pot structure introduces some exceptions to the rules and regulations, it is crucial for investors to discuss their specific circumstances with a qualified and knowledgeable financial advisor before making any decisions. The overall impact on the retirement industry will depend on individuals making prudent choices regarding their financial futures, guided by professional advice. At Warwick Wealth, we are dedicated to ensuring that you fully comprehend these changes and how they may affect or benefit you. If you have any questions or require assistance, please do not hesitate to contact your Warwick Wealth Specialist or Advisor.
