Hi all,
Before we jump into some of the technicalities of South Africa’s ever changing retirement system, just a quick acknowledgement of how very different everything feels due to the start of South Africa’s GNU dawn (as well as the joy of our Boks making their own mark on the world). In our last letter to you we spoke about the impact of elections on Investments as well as some of the predictions of what may happen. What we hadn’t expected but did see is unprecedented in African history where a liberation party, peacefully and diplomatically conceded majority control to a government of national unity. We are not out of the woods, but it does feel like a significant moment in our democratic history and one that we should all get behind and encourage. Our currency and local stock markets have enjoyed the news but hopefully some of the changes will be felt at the coal face of everyday life in RSA. Like a supporter at the Rugby games, it does make you proud to be a South African. Now to the most recent change:
What is potting with the new two pot Retirement System?
We can always trust Nando’s to put out a comical advert around the state of current affairs in South Africa, but with the implementation of the new two pot system as from 1 September 2024, we thought we would share some of the key information points to be aware of.
The two-pot reform will change how fund members can access assets in their retirement funds and aims to achieve 2 objectives:
- To allow fund members not yet retired access to a portion of their retirement assets in times of acute financial stress.
- To improve long-term preservation of retirement assets until fund members retire.
These are almost contrasting objectives. The previous legislation did not allow members to access their retirement savings until age 55 as the government (and ourselves) prefer investors to preserve their money and use it exclusively for retirement. This eases the burden on government to provide old age and social security grants.
By giving people access to their retirement savings before they turn 55 means that they may not have enough savings for when they do eventually retire.
The reason for this change had to do with lessons learned over Covid, where people’s finances were severely stretched, and they wanted access to some of their savings. In fact, some people were resigning in order to access their pensions, which fixes a short-term need but makes a huge hole for them in the long-term. Government didn’t want people resigning in order to access their savings in dire need before 55.
The new two pot rules attempt to walk a middle road between allowing investors to have access to their money earlier than 55 or retirement, but at the same time, making sure that enough is kept in the retirement pot for one day when they do retire.
How it will work is that now, when you make contributions to your RA/Pension/Provident Fund, from 1 September 2024, these contributions will be split into 2 pots, with 1/3 going into a savings bucket, and the other 2/3 going into a retirement component. Investors will be able to access the money sitting in their savings component before 55, but not the money in their retirement component. This savings pot will be ‘seeded’ with 10% of a clients existing Retirement Funding to a max of R30k on the 1st of September.
If we put numbers to it, and you made a R9K monthly contribution, it would automatically be split into R3K into your savings pot and R6K in your retirement pot. One would be able to access the money only in your savings bucket before 55.
Each person will be limited to one withdrawal from their savings pot per year, at a minimum of R2,000 and these will be taxed according to your marginal income tax rate, which is much higher than the rate of tax applied when you retire. Remember, once you are over 55, you can access all the money in the savings pot and will be taxed on retirement tax tables which are lower than income tax tables.
Something else to note is that both pots are invested in exactly the same way as before. For investors not planning on withdrawing, the only difference they will notice is the way their savings is displayed. Previously they would have seen one amount, and now, that same amount will be shown split into the two different pots.
Lastly, although the above changes will allow retirement fund members more opportunity to access their retirement fund savings, we would still like to encourage members to preserve these savings for as long as possible. Should a member consider withdrawing from their savings component, it is important to fully understand the impact it will have on their planning for retirement and their ability to retire comfortably.