Last week National Treasury published two new major retirement reform discussion papers.
- Creating a “two-pot” retirement system with an emergency savings fund, to which access by members will be allowed on a continual basis, and a retirement fund savings system where all contributions will be maintained until retirement.
- Giving greater protection to members of fast-growing commercial umbrella funds.
The government has been progressively reforming and restructuring the savings and retirement legislative framework since the publication of a set of discussion papers following the announcement made as far back as in the 2012 budget.
So, what are the problems with the current policy design of retirement funds in South Africa?
- There is insufficient preservation of retirement funds before retirement. When individuals resign, they cash in their retirement funds and do not preserve them and hence are left with very low, if any, savings when they retire.
- People in financial distress, under the age of 55, can only access their retirement funds (full benefits) if they resign.
These two problems appear to be in opposition to one another. On the one hand, there is a need for greater preservation and on the other hand, there is a need to allow individuals to get some access to some of their funds, in emergency situations, without placing their employment at risk.
National Treasury noted in the 2021 Budget financial sector updates the consideration to allow limited pre-retirement withdrawals from retirement funds under certain conditions if it is accompanied by mandatory preservation at resignation.
One of the options currently proposed is called a “two-pot” system, which will enable the restructuring of retirement contributions into two-pots. Your contributions to your pension savings will be divided into two pots.
- One-third of your contributions will be allocated to an account (Pot One) where you can access it at any time before retirement and,
- Two-thirds will be allocated to a Pot Two account, which will not be accessible before retirement and must therefore be preserved until retirement.
Treasury hopes that allowing access to one-third of future contributions at any time and removing the ability to withdraw the full amount upon resignation will eliminate the incentive to leave employment to gain access to retirement funds. That greater accessibility and flexibility could encourage more savings into retirement funds.
The new system will only apply to contributions to a retirement fund from a future date (probably 2023).
To download a copy of the 21-page detail proposal please click here:
Comments on the proposals can be sent to National Treasury by January 31 2022 via email: firstname.lastname@example.org.
Visit www.retirementplanning.co.za for more information on the books “The Ultimate Guide to retirement in South Africa” and “Secure your Retirement”, which was written by Wouter Fourie and his co-author, Bruce Cameron.