Workers have been warned against impulsive spending as the country gears for the two-pot retirement system which will give people early access to their retirement funds.
The system kicks off on September 1 and is aimed at cushioning the financially-burdened workers by allowing them to withdraw from their retirement funds.
In the current system, workers can only access their pension or provident fund when they resign or change jobs.
John Anderson, executive enablement and solutions at Alexforbes said the system was designed to strike a balance between long-term financial security and immediate financial needs.
He said this marks a significant shift from the traditional savings model and requires retirement funds to engage more proactively and directly with fund members.
He advised workers to be also vigilant and calculated when deciding to dip into their funds.
“Individuals should ensure they get advice prior to taking any action, weighing the pros and cons of their decisions. Members are encouraged to seek holistic financial advice. Strategies should include rebuilding after accessing funds, making additional voluntary contributions and utilising rewards programmes to ease financial burdens.
“As we approach the implementation date, it’s essential that individuals engage with their service providers, understand the new rules and prepare for a more flexible retirement savings journey,”
— John Anderson, executive enablement and solutions at Alexforbes
“As we approach the implementation date, it’s essential that individuals engage with their service providers, understand the new rules and prepare for a more flexible retirement savings journey,” said Anderson.
The two-pot retirement system is for any South African who has a pension fund, provident fund, retirement annuity, or preservation fund.
It excludes legacy retirement annuity funds, beneficiary funds, unclaimed benefit funds and pensioners.
It also excludes those who were 55 years or older on March 1 2021 and have remained a member of the same provident fund.
These members can choose to opt into the two-pot system. They have until September 1 2025 to decide.
The system will divide member benefits into two pots; the saving pot and the retirement pot. Members will have the option to make one taxable withdrawal per year from the savings pot. The minimum withdrawal amount is R2,000.
At retirement, lump-sum withdrawals from the savings component are taxed according to the retirement fund lump-sum benefits table.
The first R550,000 is tax-free.
A pre-retirement withdrawal could also push a member who is at the upper end of his or her marginal tax bracket into the next tax bracket.
Anderson said withdrawal will not be instant and that some individuals may encounter special additional requirements before gaining access to their savings pot.
“Some of the delays will include consent being required by a non-member spouse where divorce proceedings are underway. At time where the member has a pension-backed housing loan in place, a check needs to be undertaken to ensure that the member will have sufficient money to cover the loan following the withdrawal. Sometime individual’s tax issues might cause delays.
“It’s important to ensure that administrators have covered all the various scenarios in ensuring the fund is ready for the new environment,” said Anderson.
Anderson said fund administrators will charge a fee to process withdrawals from the savings component and different providers have decided on different payment models, either a fixed fee or a sliding scale.
What should providers be doing right now?
The first deadline of importance for retirement funds is July 15 2024, which is the final date for all retirement funds to submit their rules amendments for registration if they are to be assured that their rules are registered and approved before September 1, says Guy Chennells, chief commercial officer of Discovery corporate and employee benefits.
“Retirement funds submitting rule amendments after July 15 stand the risk of their rules amendments not being registered in time which will result in the delay of implementing two-pot and paying out savings withdrawal claims,” said Chennells.
“Failure to register rule amendments for two-pot implementation with the Financial Services Conduct Authority (FSCA) by September 1 will mean no savings withdrawal claims can be paid from the fund. This could also impact the tax approval status of retirement funds when the South African Revenue Services (SARS) does their annual tax assessments.
“If retirement funds lose their tax approval status, it will mean that contributions to retirement funds are then no longer tax deductible and employers could have an industrial relations disaster on their hands.”
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