Allan Gray warning for pensions in South Africa

South Africa’s new Two-Pot retirement system is less than two months away, but fund members have been warned about the dangers of dipping into retirement savings.
President Cyril Ramaphosa assented to the Pension Funds Amendment Bill into law on Sunday (21 July). Although the draft Revenue Second Amendment Bill still needs to be finalised, the new system should launch on 1 September 2024.
The new two-pot retirement system, as the name suggests, will have a savings and retirement pot.
The savings pot will hold one-third of all retirement savings and will be accessible before retirement age, with annual withdrawals allowed.
The retirement pot will hold the remaining two-thirds of retirement savings and will only be accessible upon retirement, preserving the majority of retirement savings.
A third vested pot will hold all the retirement savings until 31 August 2024, except for the 10% (capped at R30,000) seed capital for the savings pot and will follow existing legislation.
According to Allan Gray’s Belinda Carbutt, members should be cautious about withdrawing from the fund as it will have tax consequences and impact long-term savings goals.
“The new system will essentially allow you to ‘ink your cross’ annually, giving you the option to make a partial withdrawal from your retirement funds,” said Carbutt.
“While this is naturally a tempting thought, it is important to understand the intent is for emergency access and should not impact the way you think about your long-term retirement savings.”
Carbutt provided an example involving a member who has a pension balance of R100,000 on 31 August 2024.
On 1 September 2024, this savings component will be seeded with R10,000 (10% of R100 000) from their vested component.
Thus, R10,000 will be available to be withdrawn from 1 September, minus the tax deducted at the member’s marginal tax rate and amounts owing to SARS.
That said, the savings pot’s funds are not a “use it or lose it” scenario, as the amount can remain invested until the member retires.
If their retirement contribution from September 2024 is R3,000 per month, R1,000 will go to the savings component and R2,000 into the retirement component.
They will then have the option of one withdrawal per tax year of at least R2,000 to the full amount in their savings component.
“It is important to note that if the member decides to withdraw, their withdrawal will be taxed at their marginal tax rate. This tax is deducted before the withdrawal is paid to the member,” said Carbutt.
Taking out the savings pot can also have long-term consequences.
There are two possible outcomes over the next 30 years if the member retires at age 55.
- On the high road, they accessed their savings component and stayed focused on the long term.
- On the low road, they withdraw the available amount every year.
If they take the high road, their total retirement benefit will be 53% more (R2.7 million vs. R1.7 million).
In addition, they will have the option to take a cash portion at retirement. This will be six times greater than the amount in cash they would have received if they had withdrawn monthly before retirement (R946,122 vs. R151,268).
By staying focused on the high road, the member will also have an effective tax rate of 11%, compared to 31% (marginal tax rate) for dipping into their savings component.
Allan Gray is not the first major investor to warn of South Africans not to withdraw from their savings pot.
Alexforbes said that new members who contribute 15% of their income to their retirement savings could see their replacement ratio (the percentage of an individual’s employment income that is replaced by retirement) rise to 75% if they don’t access the savings pot before retirement.
For those who remove the 100% annual withdrawal limit from the savings pot, this will drop to a 50% replacement ratio.
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