Col 11: Your future and the two-pot retirement system

You must be very aware of the problems associated with the two-pot retirement system due to be introduced from September 1 this year. The system could see investment market sinking and inflation going up.

But the biggest danger is that you may never have sufficient retirement capital on which to retire financially secure, particularly if you use the two-pot system to its maximum extent.

It should not be seen as a bank savings account – it is not.

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

Beware the two-pot retirement system

There is going to be an enormous impact on the South African economy from the introduction of the two-pot retirement system. A flood of money will come out of the newly created ‘savings’ retirement accounts that will negatively affect investment markets and push up additional individual spending, possibly affecting the inflation rate.

The Government expects R5-billion in tax revenue alone  to be raised through cash withdrawals by members from the initial introduction of the two-pot retirement system. This means many more billions of rands will be withdrawn from the savings account element of the retirement system.

Every retirement fund member will be allowed, as a once-off, to withdraw the lesser of 10 percent of fund value or R30 000 from their fund at any stage from September 1, 2024.

From September your future retirement savings will be split, with one-third going into the ‘savings’ component and two-thirds being held for the day you retire.

A double-edged sword

The splitting of retirement funds is a double-edged sword. The biggest single cause of why only about  six percent of members retire with a pension sufficient to meet their needs, is  the non-preservation of retirement money. When any member left their employment for any reason they could take their retirement savings as cash and spend it on anything they liked from paying off debt, to meeting daily needs, to taking a holiday. The same applied to non-member spouses when there was a division of retirement savings on divorce.

The splitting of retirement savings means members will now no longer be able to take all their retirement capital as cash when they leave employment. At least two thirds of the capital must be kept until retirement to be used as a pension for life.

But the splitting will now result in all retirement fund members, including people who use commercial retirement annuities, to:

• Initially withdraw the lesser of 10 percent or R30 000; and,

• Once, every following year, to withdrawal from savings accounts a minimum withdrawal of R2 000.

The issue now is that more people will be able to withdraw from their ‘saving’ accounts without losing employment. This would have helped many people who earned less money during the Covid-19 lockdowns but it is now virtually open sesame.

The splitting of retirement funds means more people will now have access to retirement capital before retirement.

The big problem is that many people simply do not have enough to pay for their daily needs and need access to capital. The two-pot system will help but it has significant dangers.

Be aware

The big warnings of the two-pot system are:

• Anyone who accesses their retirement capital from their retirement savings account, is highly unlikely to retire financially secure. If you want to retire financially secure you must leave all your money in both the savings and retirement components; and, on retirement combine both components to buy a pension for life.

• Any withdrawal from a savings account will result in your being taxed at your marginal rate of tax. This means that your marginal rate could also increase. Even people who earn less than the initial tax threshold of R95 750, could find themselves suddenly having to pay tax. The tax threshold has also not been increased in this year’s budget.

• If, as expected, investment markets are negatively affected by the large scale withdrawals, and you withdraw late, you will see a greater knock-on on your savings account when you withdraw as capital values decrease.

• Commercial retirement annuities (R.As) members will add to the once-off withdrawal and future withdrawals problems. Until September this year, R.A savings can not be withdrawn until retirement. Retirement from an R.A can and shall take place at any stage after aged 55. At retirement you can commute up to one-third of your retirement capital, with the first R550 000 being tax free; and, the remaining two-thirds being used to buy a pension for life. From September any amount you withdraw from all retirement ‘savings’ account will be deducted from the R550 000.

Election Day: May 29

In what can only be called a pre-election, stand-still National Budget, the tax increases are hidden by not making any adjustments for inflation, both on the marginal tax rate tables and  on any allowances, such as medical aid claims and tax-free amounts allowed for the day you retire (such as the R550 000 tax-free that can be  paid as a lumpsum).

Pensioners will also be affected by fiscal drag because the tax rebates for all age groups have not been increased from last year.

The state old age grant has been increased in line with inflation going from R2 015 to R2 185.

There is a lot more detail on this in the book, The Ultimate Guide to Retirement in South Africa. For more information on how to purchase the book go to Buy Now on the website  www.retirementplanning.co.za

Related topics:

https://retirementplanning.co.za/the-two-pot-retirement-savings-system/

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