South Africa’s new two-pot retirement system – the crucial points you need to know

Financial services group Alexforbes has thrown its weight behind the country’s new two-pot retirement system, citing that the system set to be implemented at the beginning of September could result in better retirement outcomes for members.

Head of retirement consulting at the group, Avishal Seeth, said they “support the implementation of the two-pot retirement system because of the positive impact it will have on the financial future of retirement fund members.”

“The two-pot system is likely to improve new members’ retirement outcomes by 2 to 2.5 times compared to those under the current system,” said Seeth.

“It’s a balanced solution which aims to address retirement fund members’ needs for longer-term financial security and short-term financial relief,” he added.

Seeth outlined that the most crucial points of the system that people should be aware of are:

• From 1 September 2024, any amounts saved in a retirement fund will be split into a savings component and a retirement component;

• One-third (about 33% of retirement savings) automatically goes into the savings component;

• The initial amount in the savings component will be 10% of the amount saved in the vested component, up to a maximum of R30,000;

• The minimum withdrawal amount is R2,000.

The main objective of the two-pot retirement fund “is to improve members’ retirement outcomes by requiring increased preservation before retirement,” said Seeth.

He said that these retirement reforms are important because insights and data analysis show that only about 6% of members can expect a replacement ratio of 75% or more of pensionable salary – mainly due to 91% of members taking cash withdrawals when changing jobs.

Another purpose of the system is to provide South Africans with a means to access short-term savings in emergency situations.

Despite support from numerous experts, others say that such a monumental change in South Africa’s retirement system poses risks – especially in its implementation.

Rael Bloom, an investment specialist from Coronation, said that while the “system should result in better retirement outcomes for members in the long term”, “if the system is not implemented properly, then there is a risk of member discontent, which could undermine confidence in the retirement industry.”

These include implementation/execution, initial seed capital payment, and sustainability risks.

Despite these risks, some experts like Seeth remain optimistic that the system’s promises will bear fruits in the long run.

Read: 6 ‘rules of thumb’ to save enough for retirement in South Africa