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Col 1: The “two-pot” retirement savings system

The “two-pot” retirement savings system, to be known as the two-component system, has, unfortunately, turned into a debate on the detail of the draft legislation.

Bruce Cameron 15July2023 The two pot retirement savings system

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


There are more important issues that should be decided before the two-pot system is taken any further

Three of these issues are:

  • Proper research into who can and can’t be a member of a retirement fund.

Most lower-income earners simply cannot afford to save for retirement. Many have face historical high transport costs, they need to educate and feed families with rising inflation, deal with the cost and failure of electricity supply, poor housing, and a totally inept health service.

According to the recently published 42nd edition of the Sanlam Benchmark Survey 40% retirement fund members said that if they were to opt out of their retirement fund, it would be because their financial needs are too large, and they need the money now. (This will be the subject of the next column in this series)

  • Introduction of legislation and subordinate regulation of other legislation that will have a significant impact on the success of the two-pot regime. The most important piece of legislation is the implementation of the Conduct of Financial Institutions Bill (CoFI).

  • Setting a clear policy for unclaimed benefits. There is more than R80 billion in unclaimed benefits in South Africa. Of this R34 billion is held by retirement funds. This is a very messy field and any effort by the state to get its now very dirty paws on this money should be avoided. (This will be the subject of a column in the coming weeks).

In brief the two-pot system will:

  • Allow you as a member from February 29, 2024, to withdraw an amount which is the lesser of 10 percent of the benefit or R25 000;

  • From March 1, 2024, your retirement savings will be split in two:

  • Two thirds will save for retirement and must be used to buy a pension for life; and,

  • One third will go to an ‘emergency fund’ which can be used once a year by the member. Any withdrawal before retirement will be at the penalised lumpsum rate of tax, it will be deducted from any amount from which you can commute one third at retirement and will result in you probably not having enough on which to retire.

  • If you do not withdraw the money before you retire or only a part of it, the preferable lumpsum rate with the first R550 000 being tax free will apply.

The two-pot system can lead to bad outcomes for members. CoFI it will help prevent those people who do not have members interests at heart from doing so. This includes retirement fund trustees, including commercial, union, and industrial and private funds; retirement fund administrators; service providers to the funds, particular asset management advisors and asset managers; and financial advisers.

There are many who behave well – but all must do so. And it means CoFI should be introduced before the two-pot system.

The two-pot system is not simple and could leave wide open areas for exploitation. Retirement is an issue of trust. If that trust is broken there will be fewer members.

An example of recent bad advice:  Recently a well-known financial adviser, who specialises in offshore investment, said that people should ignore retirement annuities and only invest offshore. His advice was simply appalling. Simply from the income and capital gains tax benefits it did not make any sense. Add any abuses of the two-pot regime to the controversy and there could be a disaster.

CoFI is one leg of the separation of regulation of the broad financial services industry. The two parts are:

  • Marketing: This is the preserve of the Financial Sector Conduct Authority (FSCA) and it affects all parts of the financial services industry; and,

  • Prudential: The South African Reserve Bank needs to ensure that the financial services industry (all or parts) does not go bankrupt putting at risk money of clients (you and me).

FSCA will be responsible for the implementation and the introduction of subordinate regulation of both CoFI and the two-pot regime.

The FSCA recently issued a statement on the application of CoFi and it seemed to imply it will take until at least 2025 to implement it.

Also subject to CoFI will be set of “Standards” that must be met by the financial services industry. The Standards can be administered by both FSCA and the Reserve Bank, or by FSCA alone. The Standards apply to all or only certain parts of the industry or certain products.

There are already 18 Standards on the books with all needing to be submitted to Parliament for approval. The current published Standards range from conditions that apply to life assurers to provide investment products for default investments for the retirement industry through to Codes of Conduct for the different sections of the industry. It can be expected that a lot more are to come.

In previous statements FSCA says CoFI ‘reshapes the future conduct regulatory framework by consolidating the conduct financial sector laws into a single overarching piece of conduct legislation’.

CoFI will promote the fair treatment and protection of clients; trust and confidence on the financial sector and promote financial inclusion.

Important parts, apart from Standards, that should be properly be in effect are:

  • The six outcomes of Treating Customer Fairly (TCF). These are:

    1. You are confident that you are are dealing with a company where fair treatment is central to the company’s culture;

    2. products and services are designed to meet the your needs;

    3. you will receive clear information and are kept appropriately informed before, during and after the time of inception of your account;

    4. you will receive information and the information is suitable, in plain language and takes into account your circumstances;

    5. you are provided with products and services that perform as intended, and the associated service is both of an acceptable standard and what you have been led to expect; and,

    6. you do not face unreasonable barriers to change products, switch providers or submit a claim or make a complaint.

  • Standards for financial advisors. This includes companies who buy a stake in a financial advisers business where, unknown to you, you are sold the company’s products and the advisers are paid over and above commissions by way of things such as share options.

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