Many had hoped for a delayed implementation date, given the development required to systems to accommodate the new structure.
The proposed amendments will allow short-term access for South Africans to their retirement fund money for emergencies within set limitations, while balancing this access with long-term preservation of savings for retirement. To effect the relevant changes, the Income Tax Act will include the following new definitions for “savings pot”, “retirement pot” and “vested pot”.
An important aspect mentioned is that some immediate access to retirement savings accumulated to 1 March 2024 could be accessed. This follows consultation and is a departure from previous comments which would not allow immediate access of past contributions.
It is expected that more detailed legislation would be released in due course, specifically dealing with:
(i) “Seed capital”, allowing individuals to have a starting balance in their “savings pot” which would be accessible at any time
(ii) The treatment of defined benefit funds
(iii) The treatment of “legacy” retirement annuity funds
Another aspect to be dealt with in a second phase of implementation, is allowing individuals who are retrenched and have no alternative source of income to be able to access their retirement pot.
What is the proposed two-pot system?
This system aims to find the right balance to help members save for retirement while allowing some flexibility for short-term emergencies. The ‘two-pot’ proposal splits new contributions from the proposed implementation date into two pots of money. For example, let’s say you are a member who has a pensionable salary of R10 000 a month and the contribution rate is 15% (R1 500 per month):
Accessing the savings pot should be as a last resort, particularly as any savings withdrawn from a retirement fund reduces your income at retirement. In addition, if you have used up all the savings in the savings pot, you will not be able to access any cash at retirement from the retirement pot. Generally, it is advisable for you to make use of other savings vehicles for day-to-day savings or to finance non-retirement savings goals.
Alexforbes’ view
For a long time, we have been advocating for improved preservation of retirement savings in South Africa. At present, when an individual leaves employment they can effectively access 100% of their accumulated retirement savings. According to the Alexander Forbes Member Insights™ for 2021, only 9% of members preserve their retirement savings when changing jobs. This in turn leads to very poor retirement outcomes as the average replacement ratio is only 31%. This means that for every R1 000 earned by a member before retirement they will only replace R310 of income in their retirement.
Although there will be access allowed to the savings pot in the new system, this is limited to one-third of the individual’s total retirement savings. The other two-thirds must remain preserved at all times.
Our modelling has demonstrated that the “two-pot” system will result in a new member accumulating more than double their fund value at retirement as compared to the current system whilst providing access to a portion of their savings annually.
Improving savings – some additional thoughts
While the two-pot proposals go some way to address the issue of preservation, at least in respect of contributions made after 1 March 2024, there are other factors that need to be considered to improve retirement savings:
Overall, Alexforbes is supportive of the changes given that over the long-term the outcomes of retirement members are much improved. In the short-term, however, there will be pressure on administrators to process significant amounts of small claims given that a portion of accumulated savings to 1 March 2024 will be immediately accessible.
It is therefore imperative that retirement funds ensure that they can accommodate the changes including:
A further implication may be that free-standing funds consider moving to umbrella funds which would cater for the changes.
Alexforbes continues to follow this closely and continues to provide input to assist in shaping the final legislation that will enable the new system. We shall apply our research, expertise and insight to ensure that the public interest is considered in decision-making.
[1] Alexforbes Member InsightsTM, 2021