Understanding South Africa’s new retirement system – everything you need to know

 ·18 Mar 2023

The newly-proposed “two-pot” retirement system will allow South Africans to have the best of both worlds, says Robert Driman and Armand Swart from Werksmans Attorneys.

The new retirement system will allow people early access to a portion of their retirement funds while still conserving a large portion for retirement.

The changes will take effect from March 2024. However, further draft legislation was not published in February, leading to concerns that industry players will not have enough time to implement changes before the deadline.

Driman and Swards looked at what South Africans need to know about the proposed system and its current status.

What is it? 

In 2022, Minister of Finance, Enoch Godongwana, published the draft revenue laws amendment bill that proposed significant changes to the present retirement system – replacing the one-pot system with a two-pot system.

The new two-pot system will affect pension funds, pension preservation funds, provident funds, provident preservation funds and retirement annuity funds (the Funds).

A “savings pot” and a “retirement pot” will be present, with members of the Funds being able to withdraw funds from the savings pots while the retirement pot’s funds remain untouched.

What happens to prior savings? 

The retirement funds that exist prior to the implementation of the two-pot system will be placed in a “vested pot.” Funds in a vested pot will still be subject to existing laws.

No further contributions can be made to the vesting pot after the two-pot system is implemented- except for provident fund members who were 55 years old or older on 1 March 2021 as their pension benefit regime will remain unchanged.

How will the contributions be allocated? 

The savings pot will only be allowed no more than one-third of a fund member’s retirement contributions.

Whereas at least two-thirds of the contributions will be allocated to the retirement pot.

Any contributions that are not allocated to the savings pot will be allocated to the retirement pot.

How will withdrawals work? 

Fund members may only be allowed to withdraw from the pot once every 12-month period, at a minimum value of R2,000.

The retirement fund will not allow for withdrawals.

At the time of retirement, the available money in a savings pot will be paid out in a lump sum.

Wheres, upon retirement, the accumulated funds in the retirement pot have to be used to buy a retirement annuity, subject to the minimum threshold amount required to purchase an annuity.

The advantage of two-pots

Fund members can currently only access their pension funds or provident funds when they retire or resign from their employment.

The National Treasury looked at reasons for introducing the two-pot system.

Firstly, a fund member may need access to their funds for a specific issue. On resignation, they would have full access to their funds, placing their long-term savings at risk.

Secondly, there are fund members who are in financial distress and cannot access their assets in investment funds.

Fund members may require additional funds immediately but can only access them if they resign.

Covid-19 lockdowns revealed the shortcomings of the current system, as many fund members were in financial distress but could not access their retirement funds without resigning or via other shams – like divorce.

The new system provides a lifeline for fund members in financial distress while ensuring that they retain most of their retirement savings, said Werksmans.

Possible issues

Although the new system should have a positive effect on fund members, there will be an administrative burden placed on funds.

Funds will have to amend their rules, introduce new complicated systems, train employees, and educate fund members.

Funds will also have a burden of direct engagement in the current system, with fund members able to initiate claims instead of their employers.

In addition, all fund members will have to carry an additional cost.

Moreover, funds and their administrators will have a short time to prepare for the two-pot retirement system’s introduction.

National Treasury said that the first stage of the legislation amendments for the two-pot system would take place from 1 March 2024, but failed to provide any other draft legislation for comment, which many in the industry expected.

National Treasury said that three areas that require additional work – a proposal for seed capital, legislative mechanisms to include defined benefit funds equitably and legacy retirement annuity funds – will be addressed in the draft legislation.

Another area that needs more attention – withdrawals from the retirement portion if one is retrenched and has no alternative source of income – will be reviewed in the second please of the two-pot retirement system’s implementation.

National Treasury’s comments imply that the implementation will occur in two stages, resulting in complicated piecemeal legislation.

Concluding remarks

The new two-pot system appears to be generally welcomed, despite the increased administrative burdens.

Driman and Swards said that the new system will give fund members flexibility in accessing a portion of their retirement funds, while still ensuring that the purpose of a retirement fund is in place.

However, they added that the delay in further legislation places industry players under extreme pressure.

Read: Bad news for salary and wage increases in South Africa

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