The implementation of the two-pot system on Sunday, 1 September 2024, has fundamentally altered the South African retirement fund landscape.
The two-pot system, which applies to most retirement funds in South Africa – excluding certain types of funds, such as unclaimed benefit funds, and specific members, such as pensioners – aims to address two key challenges with respect to the previous retirement regime.
First, the previous regime permitted members of pension or provident funds to withdraw the full value of their retirement savings on resignation or retrenchment; however, members could not access these funds in, for example, emergencies or times of financial hardship. Therefore, a concerning trend of financially distressed individuals resigning to gain early access to their retirement savings emerged, as noted in the National Treasury Discussion Paper.
According to National Treasury, from 2016 to 2018, pre-retirement withdrawals amounted to an average of approximately R78 billion per year. These withdrawals contributed to the second challenge regarding the previous retirement regime, namely insufficient preservation of retirement savings. According to National Treasury, "only an estimated 6 per cent of South Africans are able to maintain their lifestyle and replace their income fully at retirement". Irrespective of which statistic is used, it is clear that an overwhelming number of South Africans do not save sufficiently for retirement.
The two-pot system aims to combat these challenges by permitting limited pre-retirement withdrawals while requiring compulsory preservation upon termination of employment. The issue of insufficient pre-retirement preservation is nevertheless complex and influenced by a variety of factors that hamper individuals' ability to accumulate retirement savings, such as unemployment. According to the latest Quarterly Labour Force Survey, South Africa's expanded unemployment rate, which includes discouraged work-seekers, is 42,6%. It is therefore clear that the two-pot system alone cannot resolve the issue of inadequate pre-retirement preservation. Nevertheless, it may play an important role in promoting retirement savings, depending on the manner in which it is applied.
The two-pot system stems from the Revenue Laws Amendment Act, 2024 and the Pension Funds Amendment Act, 2024, both of which were promulgated earlier this year. The Revenue Laws Second Amendment Bill, currently subject to industry comment – with a further workshop held with National Treasury on 6 September 2024 – will correct and clarify aspects of the two-pot system once promulgated.
The two-pot legislation requires retirement funds, with effect from 1 September 2024, to maintain three components for each affected member, namely:
- the vested component – consisting of accumulated retirement savings as at 31 August 2024, less the amount of "seed capital" transferred to the savings component;
- the savings component – reflecting start-up or "seed capital" in an amount equal to 10% of the value of the vested component, subject to a cap of R30,000. One third of net contributions must be allocated to this savings component going forward; and
- the retirement component – being the preservation component into which two thirds of net contributions must be allocated going forward.
Under the two-pot system, affected members are entitled to an annual savings withdrawal benefit of all or a portion of the balance in the savings component. In an economic note published by the South African Reserve Bank, it was predicted that, in a moderate withdrawal scenario, affected members will withdraw an additional R40 billion from their retirement savings in the last quarter of 2024. In a high withdrawal (and less plausible) scenario, this figure is R100 billion.
Education regarding the impact of these withdrawals, particularly through member communication, is critical. Members who make such withdrawals will forgo the benefit of receiving the sum withdrawn, as well as the investment return that would have accumulated on such amount, on retirement.
Furthermore, while contributions to retirement savings are not taxed, pre-retirement withdrawals will be taxed according to the member's marginal tax rate. Once a member has applied for a savings withdrawal benefit, the applicable fund must apply to the South African Revenue Service ("SARS") for a tax directive specifying how much tax should be deducted from the withdrawal. Media reports indicate that, by the morning of Tuesday, 3 September, SARS had already processed 2,424 tax directives, based on requests of R103 million worth of savings withdrawal benefits.
Given these implications, fund advisors and industry commentators have cautioned members to make withdrawals only in emergencies and to spend amounts withdrawn prudently, for example on debt reduction (rather than consumption), so that amounts saved on servicing debt may be directed to retirement savings, thus increasing pre-retirement preservation. Nevertheless, members who request a withdrawal do not need to motivate their request and may spend the amount withdrawn as they see fit.
Notably, savings withdrawals can be processed only if the rules of the relevant fund allow such withdrawals. Each retirement fund with members affected by the two-pot system therefore needed to amend its rules to ensure that the two-pot system could be implemented from 1 September 2024 in respect of that fund. ENS worked with a number of such funds to formulate these rule amendments. In the case of funds registered in terms of the Pension Funds Act, 1956, these rule amendments needed to be submitted to the Financial Sector Conduct Authority ("FSCA") for registration before 1 September 2024.
The FSCA noted that, as at 3 September 2024, it had registered 748 rule amendments relating to the two-pot system, out of the 846 applications received – with the aim of finalising all outstanding rule amendments by the end of the first week of September.
It is therefore anticipated that, very shortly, all South African funds to which the two-pot system applies will be able to process savings withdrawal requests. The uptake and application of these withdrawals will be decisive in determining whether the two-pot system achieves its laudable goals.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.