Two-pot retirement: Treasury giveth and treasury taketh away

Published: 24/08/2022

For a decade now, Treasury has been discussing and implementing changes to our nation’s retirement legislation to support positive outcomes for retirees across the land. This has all been in an attempt to ensure that retirees will be able to exit the workforce with dignity and sufficient capital to carry them through their sunset years without the need to rely on the government or other generations.

The latest of these proposals is dubbed the “two-pot” retirement system. In essence, this is a system that seeks to strike a balance between two problems:

Maximizing retirement savings by minimizing early withdrawals.
Allowing for early access to retirement savings to address unforeseen events? (e.g. Covid -19 financial relief).

All existing retirement savings will be unaffected by these changes

Firstly, it is important to note that all your retirement savings and contributions up until the date of implementation (optimistically pencilled in as 1st March 2023) will not be subject to the new rules. These savings (and their subsequent growth) will have ‘vested rights’ – meaning that the rules that applied when you made those contributions will continue to apply to them.

The two pots – “savings” and “retirement”

The draft bill proposes that upon implementation, new contributions will be split into two pots; up to one-third will go towards the “savings pot” which can potentially be withdrawn in the future. The remaining two-thirds (or more) will go to the “retirement pot” which will ultimately be used to purchase an annuity (regular income) upon retirement.

All contributions will continue to receive a tax deduction (subject to existing limits), however if one exercises their right to withdraw from their savings pot, this amount will be added to their taxable income for the year (negating the tax deduction), and they will not be allowed to make another withdrawal from the savings pot for at least 12 months.

The gift and sacrifice

So, what has actually changed? Well, if you were never going to withdrawal from retirement funds before retirement, nothing has changed for you. For those who will withdraw prior to retirement, they have limited access (potentially only up to one-third) pre-retirement, and will deplete the amount that would be accessible as a lump-sum upon retirement.

The gift here is that you now have a point of access to retirement savings should there be an unforeseen need, however the sacrifice is that in doing so you reduce the lump-sum you can take on retirement and your withdrawal is limited to your savings pot (you do not have withdrawal access to the retirement pot).

Expected impact

There are a few outcomes that Treasury is expecting and trying to guide.

No need to resign to access retirement savings (a major asset for most): many people have found themselves with a need to resign from employment with the sole intention of ‘unlocking’ their retirement savings. The hefty taxes applicable here were not enough to dissuade these individuals. Now they can tap into retirement savings, without the need of terminating their employment contract.
Less hesitance to save for retirement: given the lack of access, people have been reluctant to contribute appropriate amounts towards retirement savings. This will be abated slightly. Here, it is imperative to say that the “savings pot” should not be viewed as a tool to save for planned expenditure, it is a backstop for when unplanned expenditure is required. Other investment vehicles would likely be more suitable for planned investments.
Retirees being more self-sufficient: in the past, South Africans have been very willing to withdraw their full retirement savings upon exiting from an employer, essentially starting from zero again with their retirement planning every time they change jobs. With compulsory preservation the retirement pot will ensure that people are always stepping closer towards their retirement goal, hopefully creating a workforce that is less retirement-anxious and more self-sufficient.

Some of the unintended consequences may be:

Retirement fund administration nightmare: the number of retirement fund members drawing from their savings pot will put strain on administrators and may lead to delays in getting these pay-outs (which by their nature will be for unforeseen issues that may be time sensitive).
Pension-backed lending door opened again: having this portion of capital available may serve as a source of secured lending to banks, and this may be the first step in allowing pension-backed lending (a proposal led by the Democratic Alliance in 2020).

South Africa’s retirement problem has been on the agenda for government for many years with many ideas proposed with varied success. This draft bill is still subject to public comment and may look different when implemented. However, the proposed changes will be a leap in the right direction in achieving government’s goal of increasing the retirement success of our people. These amendments will provide a landscape where retirement vehicles will be able to effectively do their job (build retirement assets for South Africans) whilst also offering a point of relief in dire circumstances – effectively balancing the future with the present.

Victor Bucarizza CFP®

Victor is a certified financial advisor at GIB Financial Services