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Col 17: Be careful about how you invest in your two-pots

Retirement funds over the years have generally taken the position that they invest for the long term. They do not take account of anyone leaving the funds before retirement date.

 

Bruce Cameron Col 17 Be careful about how you invest in your two-pots 22Jul2024

By Bruce Cameron
Co-author to The Ultimate Guide to Retirement in South Africa

 

So, a retirement fund member must take a chance when cashing in retirement savings that there is not a bear market; and they will be losing out on better returns when there is a bull market.

Much the same situation is likely to happen now with the two-pot system. The funds will continue with long-term investment of both funds in the two-pot system. The new system allows retirement funds to invest one third of retirement contributions in a savings account from which savings may be accessed once a year.

 

Good for savers

This is a good thing for retirement fund members, who want a financially secure retirement, as they will secure better returns.

But it is bad news for people who want to withdraw their retirement savings.

Stephen Walker, chair of the of the Actuarial Society of South Africa (ASSA) Retirement Matters Committee and member, Natasha Huggett-Henchie, say the investment policy of any retirement fund will be fund-dependent; in other words, the trustees of the fund will have to make a decision on whether to change investment policy as a result of the two-pot system.

A change would mean a lower risk investment and lower return exposure for the 1/3rd savings pot (because of future withdrawals), while maintaining the higher risk but with high returns for the 2/3rds retirement pot.

Walker and Huggett-Henchie say trustees have been adopting a ‘wait and see’ approach.

‘The trustees will not be making any changes to the funds' investment policies yet.

‘In the pre-two-pots world, most retirement fund members, who do not preserve their savings for retirement, but instead cash everything in, are not likely to see the implementation of separate investment policies for the two-pot system.’

Incidentally the requirement to invest for the long term is supported by the Pension Funds Act and most retirement fund rules.

 

Bad news for withdrawers

Huggett-Henchie says: ’Accessing your savings pot and using the money for anything other than a serious financial emergency is reckless and costly. A withdrawal comes with serious financial consequences many years later when you need the money for retirement.’

And people are planning for withdrawals on September 1.

Kanyisa Mkhize, chief executive of Sanlam Corporate, says in the latest Sanlam Benchmark Survey of retirement funds shows that that 59% of members will access their savings funds. This is up from 31% in the 2022.

Mkhize says no matter how well-intended regulatory changes of the two-pot system are, there can be ‘dire consequences down the line’ if people withdraw their savings.

And the decision will also have immediate effects.

Huggett-Henchie says withdrawals may result in:

  • potentially having to pay tax on the amount;

  • not having enough money in the savings account to benefit from the cash lump sum;

  • you will not receive cash lump sum of up to R550 000 tax-free on any early withdrawal; and,

  • an administration fee will likely be deducted. Therefore, you will not receive the full withdrawal from your savings pot.

‘Two-pot system may address the problems of the present, but, in a nation where under 10% of the population can afford to retire comfortably, what will the ramifications be later? What alternatives can we give people now to empower them to preserve their retirement savings while alleviating some of their current cash crunch?

‘Clear communication, meticulous planning and implementation is needed to ensure that policies achieve their goals without unintended negative consequences.’

Mkhize says: ‘As the financial services sector, we need to find more ways to preserve the wealth of our retirement fund members, pre- and post-retirement. Sanlam’s north star is to empower Africans to be financially confident, secure, and prosperous. Importantly, we want to change people’s stories and help them build long-term prosperity for their future selves and their families.’

 

The only way around it now

If you are wanting to withdraw, the only way is if you are allowed to make investment choices by your segregated fund, umbrella fund or retirement annuity fund. If you are able to make investment choices you could select a low-risk investment for the savings portion.

Low risk investments are mostly in cash. These investments have low returns against shares, bonds and property, which historically have much higher returns.

 

A lot of people can’t withdraw 

Huggett-Henchie, says estimates that at least  20% of the country’s retirement fund members will not have enough money in their savings pot on September 1 to make a withdrawal.

‘It is important that the first thing retirement fund members should do is ‘to start preparing for the implementation of the two-pot system on September 1 by ensuring that they can access their most recent retirement benefit statements.

‘Retirement fund members receive regular benefit statements from their employers or product providers, but most don’t pay these any attention until they need the money, change jobs or retire.

‘Understanding how much you have already saved towards your retirement is the first step in understanding how much, if anything, you are permitted to withdraw on September 1.

‘Retirement fund members can receive 10% of a person’s retirement savings (up to R30 000) that will be allocated to the savings pot. The amount in the savings pot can be withdrawn at any time as long as the withdrawal is R2 000 or more. If the balance in the savings pot is less than R2 000, no withdrawal is allowed until that savings pot grows to R2 000. This means that your fund credit must be at least R20 000 on August 31 to have the minimum amount available immediately.’

Huggett-Henchie says: ‘Rather than wait for September 1 and then suffer the disappointment of not having the minimum withdrawal amount of R2 000 in your savings pot, check your retirement benefit statement sooner rather than later.’

The ASSA Retirement Matters Committee surveyed some of the country’s biggest retirement fund administrators and found that the average benefit of the 20% of retirement fund members with retirement savings below R20 000 is projected to be around R9 000 by September 1. Of this R9 000, 10% (or R900) will go into the new savings pot. Since at least R20 000 is required to enable the minimum withdrawal of R2 000, retirement fund members who fall into this 20% category must first build up enough savings before they can access their money.

Huggett-Henchie summarises some of the most important considerations:

  • Check your retirement benefit statement to make sure you have R20 000 or more in benefits before you apply for a withdrawal from your savings pot once the two-pot system kicks in after 1 September 2024. If you have at least R20 000, you will be able to withdraw R2 000.

  • You will not be able to make a withdrawal from your savings pot unless you have a tax number.

Preferably consult a Certified Financial Planner before making a withdrawal!

For more information go to our website  www.retirementplanning.co.za

 

Related topics:

https://retirementplanning.co.za/col-15-breaking-the-financial-cartel/

https://retirementplanning.co.za/col-13-name-and-check-your-beneficiaries/

https://retirementplanning.co.za/col-12-a-better-complaints-system/

https://retirementplanning.co.za/the-two-pot-saving-system-bruce-cameron/

https://retirementplanning.co.za/two-pot-system-should-low-income-earners-belong-bruce-cameron/

https://retirementplanning.co.za/column-11-your-future-and-the-two-pot-retirement-system/

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