It seems every South African who is part of a retirement fund, is very excited with the new two-pot retirement system, which will be implemented in September.
Yet, there has been a lot of misinformation around it, and it seems people are still very confused on the issue.
Here are some of my key take-outs from the new system
– there would be two “pots” for retirement fund members: A “savings” pot and a “retirement” pot.
– On August 31, 2024, 10% of the value of your existing retirement fund (or up to R30,000, whichever is lower) will be allocated to your savings pot as seeding capital. This is a one-time transfer at the start of the two-pot system and won’t be repeated in subsequent years.
– People will have access to the savings pot at any time but they are only permitted to make a withdrawal once a year
– There is no maximum withdrawal amount that people can take out, they must withdraw a minimum of R2,000
– If you have more than one policy, you are allowed to make one yearly withdrawal PER policy
– withdrawal from the savings pot will be subject to tax at the fund member’s marginal tax rate. This means that any withdrawal will be taxed in the same way as a salary or other similar income
– If you have outstanding tax debt with SARS, they’ll deduct that from your withdrawal amount before paying you the balance
– Before, people were able to access their total lump sum amount under their retirement policy upon a resignation, while the new two-pot retirement system locks in the retirement pot until a fund member reaches retirement.
Old Mutual says that there are many myths regarding the new system, and have responded to a few “myths” surrounding it.
– Myth 1: I’ll have access to all my retirement savings.
“When the Two-Pot Retirement System goes into effect, retirement fund members will only have access to the money that’s in the Savings Component,” said Old Mutual.
“This is a new system, so to make sure you’re not starting from zero, 10% of your existing retirement savings (up to a maximum of R30 000) will be moved into that Savings Component (or “pot”).”
“This transfer will only happen once. Going forward, your Savings Component will be funded by the allocation of one-third of your total ongoing fund contributions.”
– Myth 2: My retirement savings will disappear when the Two-Pot Retirement System kicks in.
“There’s no need to panic. Your existing retirement savings will be fully protected and will stay exactly as and where they are in your current retirement fund,” said Old Mutual.
“The Two-Pot Retirement System’s rules will only apply to your future retirement contributions, starting on the effective date.”
– Myth 3: Only employee contributions go into the accessible pot.
“The Two-Pot Retirement reforms will apply to all contributions to your fund, so it will apply to both employee and employer contributions.”
– Myth 4: I can withdraw from all my pots when I quit my job.
Old Mutual explains, “Under the old/current system, you could access all your retirement savings if you resigned or were dismissed or retrenched.”
“Under the Two-Pot Retirement System, you can only access your existing (the balance as at the effective date) and Savings (subject to accessibility rules) Components when you leave your job before retirement.”
– Myth 5: I can access my retirement savings to enhance my lifestyle.
“Early access will only be granted once a year, and it should only be accessed for emergencies. It is not intended for lifestyle enhancements”.
Old Mutual notes that it is “really important to understand that withdrawing funds now will impact your retirement savings plan and could lead to you having far less when you’re ready to retire.”
“That’s why we’re recommending that you chat to your adviser first so that you can better understand the impact of withdrawing, and that you only withdraw if you need the money for an emergency.”
– Myth 6: I won’t pay tax on withdrawals from my Savings Component.
Any withdrawals made from your Savings Component will be taxed at your normal marginal rate of income tax rate.
– Myth 7: I can replace the money I withdraw from my Savings Pot as soon as I’m financially stable again.
“Your retirement savings are neither designed nor intended to be transactional savings accounts. No money that you withdraw from your Savings Component can be directly replaced at a later point.”
– Myth 8: I will need to elect to join the Two-Pot Retirement System.
“The move to the proposed Two-Pot Retirement System will be automatic for all retirement fund members, so no action is required.”
Members who were older than 55 on 1 March 2021 will be the only exception and will be given an option to opt in.
Certified Financial Planner, Paul Roelofse has also made some very good points regarding this new system:
– There is an anticipation that a lot of people are going to try and access it from 1 September.
Administrations in all the retirement funds are all gearing up now already for it.
– Look at it as an access of last resort.It’s really not supposed to be a piggy bank, it’s really designed for emergencies like COVID.
– The tax you’re going to pay on it is quite high
– Let it grow, let it go, don’t touch it if you can leave it
– The retirement pot is one that you cannot touch. It’s there for you for the rest of your working career until one day when you retire. It will be there designed to give you a pension for the rest of your life.
The most important piece of advice I would offer on this, is to speak to your financial advisor before taking any decisions before accessing any of your retirement funds – savings pot or retirement pot.