South Africa is poised to embrace the Two-Pot Retirement System, the most extensive changes in retirement legislation since the annuitisation of provident funds in 2017 known as T-Day, according to Blessing Utete, Managing Executive of Old Mutual Corporate Consultants.
Feedback gathered by Old Mutual Corporate from attendees of various conferences revealed that many had the same questions or concerns about the practical implementation of the retirement reforms. Specific issues highlighted include the rules governing withdrawals, potential for fraud, and tax implications associated with the two-pot system.
These concerns should not overshadow the significant benefits of the system, which include bolstering long-term financial well-being and providing more flexibility, he says. He adds that this will be achieved by mandating the preservation of two-thirds of retirement savings for future income, while permitting limited access to one-third for urgent financial needs.
The importance of thorough preparation and targeted member education is absolutely critical for its success, as seen by the road to retirement reforms in 2017, he says. T-Day reforms in South Africa, also aimed at improving retirement security, were delayed in order to address concerns over implementation.
We need to confront several misconceptions head-on and significantly ramp up employee financial literacy initiatives around retirement reforms specifically to facilitate a successful integration of the system, says Utete.
Misperception 1: The transition to the Two-Pot system affects all members savings and future contributions in the same way.
Reality: For the majority of South Africans, the transition is designed to be automatic for all eligible retirement fund members, requiring no action on the part of most members. Pre-existing savings as of the effective date will automatically be allocated to the vested pot, with up to 10% of these savings, capped at R30,000, seamlessly transferred to the savings pot.
Members of provident funds who were over 55 years old as of 1 September 2024 will be the exception. Because theyre eligible for retirement, they will by default remain in their existing pension and provident fund. They will instead be given a choice to structure their savings according to the Two-Pot System and will have 12 months to make the selection.
Misperception 2: The Two-Pot Retirement System will enable individuals to access their retirement funds beginning on September 1, 2024.
Reality: Although the legislation will be in effect from 1 September, disbursements wont commence immediately. Significant system preparations and a series of processessuch as deployment, seeding calculations, and verificationsmust occur first, likely taking at least five working days before a payout.
Funds will need to communicate to members about the claims process and when they will be ready to start processing claims. A seeding calculation involves determining the initial amounts to be allocated to different 'pots' or accounts based on existing retirement savings.
This calculation depends on the current amount of savings in each member's retirement account and their market value. This means that this could take several working days to weeks, depending on the rules set by the fund.
Misperception 3: Access to retirement savings under the new system must occur immediately on 1 September 2024, or members will forfeit their entitlements.
Reality: Members are not required to make any immediate decisions on whether to withdraw as of 1 September 2024. Instead, they maintain full control over their funds, with the flexibility to access their savings pot at any future point when it becomes necessary. In fact, its more beneficial for members to allow their savings to remain invested, thereby potentially increasing their value.
Misperception 4: The Two-Pot Retirement System will lead to underperformance of assets, reducing the long-term value of savings.
Reality: The structure of the Two-Pot Systemcomprising a 'retirement pot' for long-term growth and a 'savings pot' for short-term needsis an accounting exercise, not an asset allocation or investment strategy change. The adjustment of the Two-Pot Systemdividing funds into a 'retirement pot' for long-term growth and a 'savings pot' for short-term needsis primarily a matter of organising and categorising funds within existing financial structures. Regulation 28, which governs asset allocation, will continue to ensure diversified portfolios, mitigating risks and supporting consistent returns.
Misperception 5: The Two-Pot Retirement System introduces tax complexity.
Reality: The Two-Pot System maintains the existing taxation framework, providing straightforward guidelines to help businesses and members manage their contributions effectively.
Withdrawals from the savings pot before retirement are
