The President signed the Pension Funds Amendment Bill into law on the 21 July 2024, clearing the way for retirement funds to amend their rules, to enable members to access part of their retirement savings without having to leave employment. The two-pot arrangement comes into effect on the 1 September 2024. Historically, members of retirement funds resorted to various creative means to be able to access their retirement savings, for example, resigning from employment, applying for pension backed home-loans or “divorcing”.
With less than two months before the effective date, retirement funds are in full gear amending fund rules and ensuring that their systems are ready come the implementation date. By the 19th of July 2024, only 30% of the anticipated two-pot rule amendments had been received by the Financial Sector Conduct Authority. SARS is also readying itself for the anticipated influx of applications for tax directives when members claim part of their retirement savings.
Members aged 55 and over as at 1 March 2021 have to opt-in, within one year of the effective date (1 September 2024), if they want to fall under the two-pot arrangement.
Even though this new retirement reform is popularly known as the two-pot, the retirement savings will in fact be split into 3 components, namely the vested component, savings component and retirement component.
Vested component
The vested component represents the member’s interest in a retirement fund, in respect of the period up to 31 August 2024. This component is subject to and must be paid in accordance with the rules applicable prior to 1 September 2024. No further contributions may be made to this component on or after 1 September 2024.
A member can access a part or the entire amount of the vested component on leaving employment for whatever reason. This amount is not available for payment whilst the member remains employed and a member of a fund.
When a member claims a benefit on leaving employment, the vested component is taxed using tax tables applicable to withdrawal, retirement or death, whichever is relevant to the type of exit.
Savings component
Much focus has been placed on the savings component. The savings component represents that part of the retirement savings, which members will be able to access from 1 September 2024, without having to leave employment. The savings component is made up of 10% of a member’s retirement savings as at 31 August 2024 (subject to a maximum of R30 000), plus one third of the net contributions made by or on behalf of a member towards retirement (or the equivalent in the case of a defined benefit fund) as from 1 September 2024. Members will be able to withdraw funds allocated to the savings component once every tax year, should they need to, subject to a minimum of R2 000.
Withdrawing funds allocated to the savings component will attract extra costs for members. The major cost that members can expect to incur is tax. Treasury is already anticipating a tax windfall of R5 billion as result of members accessing their savings component. Members will be taxed at their marginal tax rate whenever they withdraw funds from the savings component. This can be very costly especially for members on the high income tax brackets. The other cost that members may have to pay for is the administration fee payable whenever a member withdraws funds from the savings component.
Whilst members will be able to withdraw funds allocated to the savings component, without having to provide any justification why they are withdrawing the funds, it is important to highlight that withdrawals from this component should only be done on a need basis when in financial distress or in an emergency. The responsibility to police these withdrawals sits with the members themselves.
Feedback from member communication sessions about these changes, shows that most members are already looking forward to getting the money come 1 September 2024. This is not surprising given the financial distress that most people are going through due to high inflation, high interest and over indebtedness during these tough economic times. However, for some members, the money will just be used to fund their high lifestyles.
If a member withdraws all the funds in the savings component on a yearly basis, they will be left with no funds to use should they find themselves in financial distress (for example, dismissal from employment or house about to be repossessed) or in the event of an emergency (for example, death of a loved one or medical emergency).
Retirement component
The retirement component represents the member’s interest in a retirement fund, in respect of the period from 1 September 2024. Two thirds of the net contributions made by or on behalf of a member towards retirement (or the equivalent in the case of a defined benefit fund) as from 1 September 2024 is allocated to the retirement component.
The retirement component is only accessible on retirement or death. It may also be transferred into the retirement component of another fund. On retirement, the retirement component is payable in the form of an annuity. On death, the retirement component can be paid as a lumpsum.
Even though more focus has been directed towards ensuring that members can easily access their savings component, the two-pot legislation is centred around the retirement component. The rules around the retirement component forces members to preserve their retirement savings when they change jobs. Under the pre-two-pot regime, members were able to withdraw their entire savings when they left jobs prior to retirement. When these members finally got to retirement, they had little in the form of retirement savings to live on and depended on social grants for survival.
With forced preservation (retirement component) and forced annuitisation, members will be able to accumulate a decent amount in retirement savings, which will be used to acquire an annuity in retirement. This reduces the burden on government in paying old age grants.
The two-pot arrangement is intended to balance the needs of members before retirement, via the accessible savings component, with their needs in retirement, via the retirement component which can only be accessed after the member has retired. The savings component was also a critical element for government to get stakeholders to buy-in to these retirement reforms, especially, the forced preservation.
Unintended consequences
Could there be some blind spots with this near perfect arrangement? Of course! Read further for one such blind spot.
To put things into perspective, let’s consider the following member:
Date of employment: 1 September 2024
Age at employment: 25
Starting monthly salary: R20 000
Net contribution rate: 12%
Real investment return: 5%
At the age of 50, the member in this example above will have approximately R950 000 (excluding inflationary increases) in their retirement component.
If the member never withdrew any money in the savings component, the member will have a further R475 000 in this component. If the member loses his job at this point, he can rely on the money in the savings component whilst looking for another job or waiting to reach age 55, which is the earliest retirement age for anyone.
Imagine the same member above, who religiously withdrew any money in the savings component every tax year. If the member loses his job, he will have R950 000 in the retirement component which he cannot access until the age of 55 and nothing in the saving component to use. If the member fails to secure another job quickly, he has to rely on family for financial assistance. In the absence of assistance from family, the member can become destitute whilst waiting to reach retirement age.
The imaginary member above can become a reality for people, if members treat the savings component as another bank account to withdraw money freely to fund their lifestyles. The savings component should be viewed as another vehicle for saving money towards retirement and should not be accessed prior to retirement. It is the member’s responsibility to ensure that the savings component is used in a responsible manner and should be earmarked for retirement, unless the member encounters real financial distress or is in an emergency. Retirement fund service providers and Trustees must educate members about the importance of not accessing the savings component as far as possible and use the account for its intended purpose, which is to help the member when in financial distress or is in an emergency.
It would be regrettable to see people with lots of monies invested in retirement funds living in abject poverty, waiting for that day when they can reach age 55 to be able to access their retirement savings. Consideration should be given to create a safety net for members who are out of employment who have no other means to earn a living, for that period when the member is waiting to reach retirement age.
