Pension Funds Amendment Bill – what’s cooking with the two-pot retirement reform?

At a Daily Maverick Money Cents webinar — What’s cooking with the two-pot retirement reform? — Zareena Camroodien, the head of fund governance and trustee conduct at the Financial Sector Conduct Authority (FSCA), said about 85% of retirement funds had not yet submitted the required fund rule amendments.

“To date, we have only received 131 rule amendment applications but there are around 900 retirement funds, so that’s quite a difference. We have followed up and the feedback is that most funds are either waiting for the Pension Funds Amendment Bill to be promulgated or they are waiting for board meetings scheduled for mid-July,” she said.

If a retirement fund’s rule amendments have not been submitted, reviewed and approved by the FSCA, the fund will not be able to implement the two-pot retirement reform.

The retirement reform was introduced by National Treasury after the pandemic years when massive job cuts and lockdowns saw thousands of people losing their jobs or earning a reduced income with no emergency funds in sight.

The thinking behind the retirement reform is two-fold: to encourage saving for retirement in a country where it’s estimated “only 6% are financially prepared for retirement” and to allow for members to access their savings in an emergency like the pandemic.

Panelists Camroodien and Wayne Hiller van Rensburg, the executive director of the Institute of Retirement Funds Africa (IRFA) had a vibrant discussion with the host, Daily Maverick personal finance editor Neesa Moodley, with lively interaction from viewers. These are the points that arose and were answered:

What happens if you start saving in a retirement fund after 1 September 2024? You will have two pots — two-thirds will be your retirement pot, which you will not be able to access before you retire, and the remaining two-thirds will be your savings pot — from which you can make a withdrawal once a year.

What’s the deal if you already have retirement savings? You will in effect have three pots. The two-pot system will also apply to preservation funds. All the money saved in your retirement fund as at 31 August 2024 will be your “vested” pot. This money will not fall under the two-pot reform and the rules that applied to it in 2023 remain. From 1 September 2024, the money you put into your retirement savings will be split into two pots — the retirement pot and the savings pot.

How much can you withdraw? On 1 September, your savings pot will have zero funds. To address the fact that many may want to make withdrawals immediately, there will be “seed funding”. The seed funding will be 10% of your retirement savings, up to a maximum of R30,000. This money will come out of your vested savings. The minimum withdrawal is R2,000 so if you have less than R20,000 in your retirement savings, you will not be able to make any withdrawals.

From 1 September 2025, you can make one withdrawal from your savings pot each year. The minimum withdrawal will be R2,000 and the maximum will be whatever the amount in your savings pot is. For example, if you were saving R3,000 a month towards your retirement, R2,000 would go towards your retirement pot and R1,000 would go to your savings pot. After one year, you would have R12,000 in your savings pot and you could choose to withdraw the entire R12,000 plus the returns you would have earned on that money in 12 months.

However, Camroodien cautioned that when you do make a withdrawal from your savings pot, you should factor in that you are going to pay tax at your marginal rate of tax and you are also likely to pay an administration fee. Van Rensburg said retirement funds currently charge from R300 to R400 for administration fees, although this has been known to go to R500.

What’s the deal if you were 55 years old on 1 March 2021? The two-pot retirement reforms will not apply to you. Your retirement savings are treated the same as they were a year ago with no separate savings pot.

Two-pot withdrawals should not be a light decision: Camroodien warned that you should make carefully considered decisions and refrain from making withdrawals unless this is a last resort.

“The savings pot shouldn’t be treated as an ATM. Remember, the nature of retirement funds is that it’s a long-term investment, and it must be treated as such. It’s supposed to provide you with a comfortable retirement such that you have the necessary placement ratios that you need to maintain your lifestyle. So, withdrawals should really only be in cases of dire emergency,” she said.

What happens if you are saving in more than one retirement fund? Camroodien said the seed funding of 10% of your savings up to a maximum of R30,000 would apply to each of your retirement savings funds. So, for example, if you were saving in a retirement fund independently and you also had a retirement saving fund with your employer, you would be able to access 10% up to a maximum of R30,000 from each fund.

How does this affect the R550,000 I can withdraw tax-free from my retirement savings when I retire? The short answer is it doesn’t. As Van Rensburg explained, the R550,000 will only be reduced if you made withdrawals from your retirement savings before 1 September 2024. Any withdrawals you make from your savings pot after 1 September will be taxed at your marginal tax rate and do not affect the R550,000 you get tax-free when you retire.

What funds are specifically excluded from the two-pot retirement rules? “The funds that have been carved out or are excluded are your beneficiary funds, unclaimed benefit funds, dormant or closed funds, and legacy retirement annuity funds,” said Van Rensburg. DM

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