A lot has been written, and speculated, about the introduction of the Two Pot System on 1 March 2024 to regulate access to retirement savings before the date of retirement.
Currently, members have no access to their retirement savings while they are still active members of the fund, but they have access to all their retirement money as a withdrawal benefit when they leave the fund before retirement.
In terms of the proposed Two Pot System, members will have limited access to their retirement savings while they are still active members of the fund as well as limited access to withdrawal benefits before the date of retirement.
Three investment pots will be created, namely a vested pot, a retirement pot and a savings pot.
The vested pot will consist of all contributions up to a certain date (currently proposed to be 29 February 2024). The current retirement fund regime will remain applicable to this pot. Members will have access to full fund value as a lump sum withdrawal benefit if they exit the fund before retirement. Lump sum withdrawal benefits will be taxed according to withdrawal tax table.
The Retirement Pot and fund contributions
The retirement pot will consist of two thirds of all fund contributions (and growth) accumulated as from 1 March 2024. Members cannot access money in this pot before the date of retirement. Government is considering limited income-based withdrawals from this pot in case of retrenched members under strict conditions. At retirement, money in this pot must be used to buy an annuity. Where the sum of the retirement pot and two thirds of the vested pot is less than R165 000 on the date of retirement, the full amount can be taken as a lump sum cash benefit.
The savings pot will consist of one third of all fund contributions (and growth) accumulated from 1 March 2024. Money in this pot will be accessible during fund membership. Once-off seeding (transfer) of capital from the retirement pot might be allowed to “fund” this pot and make money immediately available to members. A limitation of one withdrawal of at least R2 000 (up to full value in the pot) per annum is proposed. All withdrawals made from this pot by active members will be taxed at their marginal tax rate as it will be added to member’s taxable income for that year. At the death or retirement of a member, the money in this pot can be taken in cash or transferred to the retirement pot. The lump sum cash benefit will be taxed according to retirement tax scale.
Retirement Benefits
Provident fund members who were 55 years of age or older on 1 March 2021 will have the option to keep all their retirement benefits and new contributions in the vested pot or to create a savings and retirement pot for contributions made as from the proposed implementation date (1 March 2023).
Conclusion
The proposed new system will have some good, some bad and some ugly outcomes. The good is that, from a saving for retirement viewpoint, members will be forced to retain the bulk (at least two thirds) of their retirement contributions and savings for retirement and they will not be able to spend their retirement savings on lifestyle purchases when they change from one job to another. The retirement savings clock is therefore not restarted every time a person changes employment. From an emergency fund perspective, active fund members who have not created an emergency savings fund, can now use the savings pot as an emergency fund to fund unexpected expenses, for example medical expenses. The bad is that it does however also create the possibility of active fund members using the money withdrawn from the savings pot for non-essential expenses such as holidays or the purchase of luxury items when they previously had no access to their retirement fund money while they were active members. The ugly is that the limitation of access to withdrawal benefits removes the possibility of members who have high interest debt to improve their overall financial situation by using withdrawal benefits to pay off high interest debt or to start a business. Members who are fired and who have no access to their retirement savings will struggle financially if they do not find alternative employment soon after they are fired.
The intentions with the implementation of the Two Pot System are good and worthy of praise, but, as always, the devil is in the implementation detail and the ability to overcome the challenges created by the unintended consequences.