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Thabang Bantsi sat down with the Head of Best Practice at Alexforbes, Vickie Lange, to unpack feedback given by National Treasury to the parliamentary committee on the Two-Pot Retirement System

National Treasury, as well as the South African Revenue Service (SARS), have provided feedback regarding the topical issue of the Two-Pot Retirement System that is due to come into effect in March 2025. It aims to boost SA’s notoriously poor savings culture by separating retirement savings into retirement and savings pots.

Although final legislation has yet to be issued, and parliamentary approval is still required before the final verdict is communicated to members, Thabang Bantsi sat down with the Head of Best Practice at Alexforbes, Vickie Lange, to further unpack feedback given by National Treasury to the parliamentary committee.

Can you take us through what this retirement system is and what it means for South Africans and why it was introduced?

“The main objective is to improve members’ retirement outcomes by requiring increased preservation before retirement. These retirement reforms are important because our statistics show that only about 6% of members can expect a replacement ratio of 75% or more of pensionable salary. This is mainly due to 91% of members taking cash withdrawals when changing jobs. Considering various assumptions, the two-pot system is likely to improve new members’ retirement outcomes by 2 to 2.5 times compared to those under the current system,” Vickie says.

Vickie further added that the two-pot system will essentially provide a balanced solution by aiming to address retirement fund members’ needs for longer-term financial security, as well as a short-term financial relief should the member require some of the funds.

National Treasury has proposed 1 March 2025 as the new effective date for these changes to come into effect. The below is a diagram depicting the above:

What are the significant reforms of the Two–Pot Retirement System?

Some of the significant reforms that the two-pot system will provide are the following:

  • Will require a preservation of retirement savings by ensuring that from 1 March 2025, two-thirds (67%) of contributions, including investment growth, be preserved and annuitised at retirement.
  • The system will enable limited access to retirement savings by allowing one-third (33%) of contributions from 1 March 2025, and investment growth thereon, to be accessible as lump sums before or at retirement. Tax applies to all lump sum withdrawals.
  • It will also continue to allow members to have lump sum access to their retirement savings accumulated before 1 March 2025 on resignation, dismissal or retrenchment. There will be tax implications on all lump sum withdrawals.

How will the two-pot system affect vested benefits?

The vested component protects vested rights that exist for members of funds as at 28 February 2025. Vested rights mean that their existing rights/rules apply to retirement savings before a change in regime. All the retirement savings a member has accumulated before the two-pot system is implemented will stay in the vested pot. The vested component includes all accumulated retirement savings until 29 February 2024, plus investment growth into the future. If members leave their employer before retirement through resignation, retrenchment or dismissal, they do have access to these savings as a cash lump sum, which will of course be subject to tax.

Are the total contributions to a retirement annuity still tax deductible post March 2024, considering we will have access to one-third of the contributions?

“As with the previous system, members will still receive a tax deduction on their contributions, as per the current laws. This means that contributions remain tax deductible up to 27.5% of remuneration, up to a maximum of R350 000. This is something to be cognisant of when looking to tap into retirement savings and understanding the tax implications thereof,” she explains.

How is Alexforbes preparing to introduce the system to its clients and employees?

“Alexforbes have significant implementation plans that have been progressing based on draft legislation so far. We hope that the legislative process is not delayed and that we have final legislation early next year, so that we can move forward with certainty in our implementation plans, for example, to make changes to our systems, process, and issuing communication to our clients. This is all important to ensure everything works well for members. We are managing their money and have a duty to do that responsibly,” Vickie says.

One of the aspects that Alexforbes is working on is introducing a new seamless process for claims from a savings pot. A member will be able to log onto the digital platform, AF Connect, and start a claim process themselves without having to involve their employers. Although it is not recommended that members withdraw from their savings pot, unless they have no other choice due to a financial emergency.

How secure are members’ investments under this new two-pot system against factors such as economic recession or volatility?

Vickie further clarified that the legislation does not prescribe what the investments strategy should be, therefore, the trustees of retirement funds will be reviewing the investment strategies for their retirement funds and deciding whether a change is needed.

It’s important to keep in mind that the purpose and objective of retirement savings remains unchanged and it’s important to note that the investment security of both pots will depend on various factors, including diversification, investment strategy, and the overall performance of financial markets.

The main objective is that all retirement savings are for retirement and require a long-term investment strategy. Each component has different options, but the ultimate objective remains unchanged.

Although market volatility may potentially impact the value on investments, what protects the member is the long-term preservation of the retirement pot which allows for recovery and growth over time.

Will the Two-Pot Retirement System impact housing loans?

Vickie explained how the treatment should be no different to current law: “If retirement savings is used as collateral for the housing loan, then that amount is inclusive of all the pots. So deductions for home loans will apply across all the pots, including the savings pot.”

There are, however, limitations to how much of the overall amount in the fund can be used as collateral. For example, the revised Bill that has been issued refers to 65%. This is an important factor that members should also be aware of.

Why should an individual consider an investment strategy under the new system?

Whether to consider a different investment strategy or not really depends on the member’s objectives and goals. If a member does not want to use their investments in the savings pot for a retirement purpose, then they should explore what options are available to them through the funds investment strategy. Many funds offer member investment choice. It’s important for members to get advice before making final decisions to change their investment strategy.

Remember that all money in the retirement fund should be used for a retirement purpose which will pay an income when you are no longer able to work. Preservation is a top priority in the communication that’s being shared with members.

Retirement funds will be required to “seed” a portion of 10% of the member’s accumulated retirement savings. What does that mean for member funds?

Vickie took us through how the seed capital provides a starting balance in the savings component. This starting balance will be calculated as 10% of a member’s fund credit as at 28 February 2025, but is limited to a maximum of R30 000. It will be a once-off amount.

Seed capital will apply to each fund a member belongs to and applies per contract. Contracts apply to retirement annuity funds and preservation funds.

Seed capital is not ‘free money’, but money transferred from the vested component (in other words, the retirement savings a member has accumulated up to 28 February 2025) to the savings component.

Any advice for individuals who are still uncertain about what to expect?

Vickie elaborated on the importance for members to read the communication being issued by their trustees or consultants and administrators to the fund. Alexforbes, for example, has a My Money Matters toolkit on their website which includes relevant and useful information about the two-pot system.

All members are urged to seek out retirement benefits counselling and advice from a financial planner before making any decisions about their investments and savings.

Any other comments you believe are important for your clients and fund members to know about the new system?

If people are feeling the pinch financially, as times are difficult at the moment, then they can consider a few other solutions or options that are available to them rather than taking money out of their retirement fund, for example:

  • Reviewing your budget and where possible reduce expenses.
  • Looking at how to get better rates on insurance.
  • Reducing debt via an appropriate debt solution, as an example, you could consider debt consolidation or debt counselling. The solution depends on your personal needs and circumstances.
  • Make use of rewards and discounts where appropriate.
  • We are making the AF+ solution available to clients to help make a real difference, well beyond what they could get from accessing their savings accounts.

It seems that the ultimate retirement outcomes under the two-pot system will be better than is currently the case. There are certainly benefits in being able to access money for an emergency through the savings pot and in having the assurance that one can.

What Vickie reiterated often was that for the best retirement outcome, one should be invested for as long as possible. Alexforbes is committed to guiding its clients and members and helping them understand the changes. As we wait to hear final outcomes of the two-pot system, this provides retirement funds with sufficient time to communicate and consult with their members about how the two-pot system will affect their portfolios, as well as communicate the rule changes that will come into play.

A reminder to members of their responsibility to take control of the future by taking control of their investments and savings. The ultimate goal is to build long-term wealth through vehicles such as retirement or other available funds.

Alexforbes supports the implementation of the two-pot system because of the positive impact it will have on the financial future of retirement fund members.

Thabang Bantsi is an MBA candidate at Wits Business School, a Senior Client Manager, and Feature Writer.

By Editor