A call from National Treasury for public comment on proposed changes to legislation, as part of the overhaul of SA’s retirement savings industry, discloses a very important aspect about accessing your pension fund in that members of pension and retirement funds will not be able to access their existing pension fund money once the new legislation comes into effect next year.
In effect, the new ‘two-pot’ system seems to have evolved into a ‘three-pot’ system.
The most recent statement from Treasury labels the existing funds in a pension or retirement fund as “vested funds” that will be placed in a “vested pot” when the new regulations come into effect on 1 March 2023.
The vested pot remains untouchable.
New contributions to retirement funds from 1 March 2023 will be split between a “retirement pot” and a “savings pot”.
People will not be able to access any of the funds in either the vested pot – all the accumulated contributions and accumulated returns up to 28 February 2023 – or the new retirement pot. Only funds in the new savings pot will be accessible, which will still be empty come March next year.
Treasury’s statement explains it clearly: “All contributions and growth that are accumulated before 1 March 2023 will have to be valued at the date immediately prior to implementation, to enable vesting of rights (called the ‘vested pot’). The rights of members in these funds will be protected – but it also means that the conditions that were attached to those contributions will remain in place.
“The ‘savings pot’ will then be accumulated from 1 March 2023, which means that the proposal for seed finance or capital into either (new) pot is not supported.”
Many requests – but ‘No’
“While there were many public requests for immediate access to accumulated retirement funds, it would not be in the best interest of members or the stability of retirement funds to do so, particularly at a point when the value of accumulated assets is already under pressure,” says the statement.
“These products were not designed to accommodate such a withdrawal, and it is members who will suffer if their retirement interest is diminished by large lump sum withdrawals.”
Treasury says the two new pots will grow from the date of implementation, while the vested pot will still operate under the rules that were in place before the current amendments to legislation.
How it works …
Treasury provides a clear and definite example of a person who has R200 000 in a provident fund at the time of implementation of the new scheme.
“From 1 March 2023 onwards, one-third of their (new) contributions are deposited into a ‘savings pot’ and two-thirds of their contributions are deposited into the ‘retirement pot’.
“After two years, there is R20 000 in the savings pot, R40 000 in the retirement pot and R220 000 in the vested pot. Person A faces some financial difficulties and can withdraw the R20 000 from their ‘savings pot’ without resigning to gain access to their retirement savings.
“No further withdrawals from the savings pot can be made for another year,” says the statement.
“After another two years, Person A has R25 000 in the savings pot, R100 000 in the two-thirds retirement pot and R250 000 in the vested pot.
“Person A resigns to join another company. On resignation, the one-third savings pot and the two-thirds retirement pot can either stay in the current fund or be transferred to another fund which has a savings pot and a retirement pot, potentially at their new employer. The one-third savings pot would still be accessible at any time,” says Treasury.
It adds that any amounts withdrawn from the savings pot would be included in a person’s taxable income for tax purposes.
Eye on the long term
Treasury notes that the development of the legislation followed a long process of consultation with pension and retirement funds, fund administrators, fund managers, unions and representative bodies, as well as input from the general public. The overhaul of the pension fund system was first mooted in 2012.
It has taken a long time, but providing for retirement is a long-term endeavour.
There are several reasons for restricting access to money already invested in retirement funds, including:
- Treasury notes that immediate access to current funds might lead to a big outflow from funds, which might cause liquidity problems for most funds;
- Retirement funds invest in long-term assets, and large withdrawals might force funds to sell investments at low prices; and
- Administrative systems and existing fund regulations are not designed to facilitate short-term withdrawals.
Treasury notes that people have a few options regarding their existing retirement funds.
The member of a retirement fund can transfer the vested pot to another vested pot within a provident preservation fund without any tax consequences, or the existing savings can be transferred to the new retirement pot to consolidate all the retirement funds in the same pot.
When the member reaches retirement age, they can access all the money in their savings pot (subject to tax according to lump sum withdrawals) – or transfer it without tax to the retirement pot too.
The current stipulation that retirement funds must be invested in an annuity to fund the members’ retirement remains in force.
A welcome change is that people will be able to make additional contributions to their savings pots.
The benefits are obvious, not least of which is that this will encourage savings.
The savings pot might provide better returns than a bank account, and the limit of only one annual withdrawal will encourage long-term savings.
Treasury reiterates that the goal of the proposed changes to legislation governing pension funds remains to ensure that people have enough money to live on after retirement, and also to reduce the instances of people resigning from jobs for the sole reason of being able to access their retirement funds in time of need – leaving them unemployed and without any savings.
Early withdrawal implications
The statement on the progress of the changes still warns people that early withdrawals from the savings pot will have implications.
“Firstly, you lose out on the returns on investment in your savings pot. Secondly, you pay more tax if the withdrawal is before retirement,” says Treasury.
The minister of finance confirms that further retirement reforms – related to mandatory or automatic enrolment of all employees in some kind of retirement fund, including workers previously excluded from formal pension funds – can be expected.
“Consultations for these reforms will continue over the next year, and legislative proposals finalised in 2023 for tabling in Parliament,” according to the statement.
“National Treasury is also exploring complementary measures to better incentivise long-term savings alongside better financial planning and advice to promote higher levels of saving and preservation, including progressively increasing the percentage saved (e.g., from 12% to 15% of income).”