JONATHAN BOTHA: The two-pot retirement system is actually three pots

In SA, retirement planning is a critical aspect of financial management, with individuals typically channelling their savings into either individual retirement annuity funds or employer-sponsored pension or provident funds.

However, despite the importance of building a robust retirement nest egg a significant challenge persists: the propensity for individuals to withdraw their entire retirement funds upon leaving employment. 

This practice has raised concerns about the financial wellbeing of retirees, as it often leads to inadequate savings for retirement and increased dependence on state support. Recognising the need to address this issue and promote better financial outcomes for retirees, the Treasury and industry stakeholders have collaborated on a strategic initiative: the two-pot retirement fund system. 

Before delving into the details of the two-pot retirement fund system, it’s essential to grasp the existing landscape of retirement savings in SA. At present, when an employee leaves their employer they have two primary options regarding their retirement funds: preservation or withdrawal. 

Preservation entails keeping the retirement funds invested, allowing them to continue growing until retirement age. However, a significant number of individuals opt for the latter option, withdrawing their entire fund in cash upon leaving employment. While this may be necessary in cases of retrenchment or financial hardship, it often results in irresponsible use of funds and inadequate savings for retirement. 

Consequently, many retirees find themselves in a precarious financial situation, relying heavily on state support to make ends meet. This reliance not only strains government resources but undermines individuals’ financial independence and dignity in their golden years. 

The strategy  

In response to these challenges government and industry stakeholders have devised a strategy aimed at improving financial outcomes in retirement: the two-pot retirement fund system. This innovative approach seeks to strike a balance between providing individuals with access to their retirement savings when needed and ensuring long-term preservation for retirement income. 

However, implementing such a system is not without its challenges, particularly in addressing the concerns of various stakeholders. Trade unions, in particular, have voiced opposition to forced preservation, arguing that it is futile to save for the future when individuals are struggling to meet their immediate needs. 

The two-pot retirement fund system introduces a fundamental shift in how retirement contributions are managed. From September 2024 all contributions will be divided into two sub-accounts: the savings pot and the retirement pot. 

The savings pot, comprising a third of contributions, serves as a flexible account that provides members with access to excess funds when needed. However, withdrawals from this pot will be fully taxed as regular income, discouraging impulsive or unnecessary withdrawals. At retirement the savings pot can be accessed as cash or used to purchase a pension income through life annuities or living annuities. 

Conversely, the retirement pot, which is two-thirds of contributions, is designed for long-term preservation and income generation in retirement. This pot will be inaccessible until retirement age and must be used to purchase a pension income through life or living annuities. 

Smooth process

Transitioning existing fund members to the two-pot retirement fund system requires careful consideration to ensure a smooth and equitable process. Existing balances will be allocated to a third pot, known as the vested pot, which will serve as a bridge between the old and new systems. 

To facilitate transition. a portion of the vested pot, up to a third or R30,000, will be transferred to the savings pot for immediate withdrawal if required. This measure aims to provide individuals with liquidity while preserving the majority of their retirement savings for the future. 

The remainder of the vested pot will be subject to existing tax and access rules, ensuring consistency and fairness in the treatment of retirement savings. This approach avoids retrospective changes that could disrupt long-term investment planning and stability. 

The introduction of the two-pot retirement fund system is expected to yield several benefits over the long term. While the short-term effect may be limited as most accumulated savings will be subject to existing rules, the system aims to incentivise greater preservation of retirement funds over time. 

By encouraging individuals to think long term and resist the temptation of premature withdrawals, the system seeks to improve retirement outcomes and reduce reliance on state support in the future. This, in turn, could alleviate pressure on government resources and promote greater financial independence and dignity among retirees. 

• Botha is wealth manager at Netto Invest.