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National Treasury’s proposed two-pot system for retirement savings

Members who access retirement savings early reduce the probability of being able to sustain themselves later in life.

South African households are always encouraged to save more for retirement purposes. Many of us don’t think so far ahead, but we should take into consideration the financial struggle we will face if we don’t start saving early for retirement – and by early, I mean in our early 20s.

The sooner you start saving for retirement, the better returns your money will generate.

However, between car, bond, and educational expenses, it’s very easy for retirement savings to be the last thing on our budget list. There have been situations where retirement members have found themselves resigning to access their retirement funds due to financial difficulty. This leaves them with very little savings when they retire.

With that being said, National Treasury has come up with a proposal to provide some kind of relief for retirement members: the two-pot system. The proposed two-pot system for retirement savings states that members are allowed to save one-third of their retirement contributions in a pot, whereby some of the money can be accessed before retirement. The other two-thirds go into a preservation pot, which preserves the money until retirement.

Government considers and sympathises with the financial challenges faced by many due to the impact of Covid-19. Before the two-pot system was proposed, many challenges remained. One of them being that, over the years, members did not preserve enough money for retirement. This could’ve been happening due to a lack of information and knowledge about retirement savings and the fund itself. Another challenge is that people are only allowed to access all their retirement funds when they resign. This leads to members resigning solely for that purpose but in the end, being left with almost nothing. The risk of experiencing future financial distress also increases if the individual struggles to find employment.

The government sees the two pot-system for retirement as a compromise.

The idea behind this proposal is that the one-pot is used to hold savings that are there to provide short-term financial assistance to struggling members. The other pot is used to hold savings that would be inaccessible and used to provide long-term financial security in retirement. The two-pot system includes not only retirement annuity funds but also pension preservation funds, provident preservation funds, and defined benefit funds. All the funds mentioned would be similar in terms of tax treatment, pre-retirement, and post-retirement preservation.

Treasury stated that the incentive for employees to resign from their jobs in order to access their funds would be somewhat eliminated, as they would now allow employees to withdraw one-third of their contributions at any time instead of allowing the full amount to be withdrawn upon resignation.

Just around 80% of retirement fund members have the problem whereby they cash out their entire retirement benefits when they are changing jobs in order to provide short-term financial relief. The proposal also stated that the portion that is accessible would be available to the member at all times, but the funds can only be withdrawn once a year, reliant on the funds’ ability to effect the withdrawals, and this withdrawal is limited to a minimum amount of R2 000. This amount is made available to assist households in need of funding for emergency purposes without the need to resign from their jobs in order to access the funds. The member that is withdrawing will have to ensure that he/she updates their details with the fund and do whatever is deemed necessary to ensure the withdrawal can be made. The member that is withdrawing would also be required to go for retirement benefit counselling or financial awareness before the withdrawal could be made.

Withdrawals from a retirement fund lead to decreased savings, which is why members are encouraged to replace these withdrawals with increased monthly contributions after a year.

The aim is to increase future retirement savings. While the proposal offers some relief short-term for members, we need to consider that members who access their retirement savings prior to retirement, reduce the probability of being able to sustain themselves during their retirement. We need to consider that retirement at the age of 65 can last up to the age of 85. This is a 20-year gap that needs to be funded by the member’s retirement savings.

While this proposal aims to provide relief for members, it also ensures that members are disciplined in saving for retirement.

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Michael Haldane

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