4 Things you need to know about SA’s new two pot system before 1 September

South Africa’s retirement savings system is one of the largest in the world. This is due to many factors, but two stand out. Firstly, we lack a strong welfare system. Yes, there is an old age grant, but it barely provides enough to survive. Secondly, you can get significant tax benefits for saving for retirement if you choose the right investment vehicle. That’s where the new two pot system comes in.

The rules governing these vehicles are due to be dramatically altered with this system. Here are four things you need to know to navigate this new landscape and secure your retirement goals.

1. What’s behind the change?

The upcoming implementation of the Two-Pot Retirement System is set to take effect on 1 September 2024. All current and future retirement fund members will be impacted by the change, so it is important to familiarise yourself with the new structure. The government’s motivation for this shift is driven by the alarming lack of preservation among investors when changing jobs. Shockingly, according to Alexander Forbes, only 9.6% of members preserve their retirement savings during such transitions.

With the new Two-Pot System, only the Savings Pot will be liquid, meaning the 90% of members who previously withdrew their funds upon resignation will have access to only a portion of their savings. This change encourages greater preservation of retirement assets, with 2/3 of contributions earmarked for long-term growth.

2. How the Two Pot System will work

The new Two Pot Retirement System divides your retirement fund contributions into two distinct pots:

• Retirement Pot: 2/3 of your contributions go into this pot, which can only be accessed at age 55 or later.
• Savings Pot: 1/3 of your contributions go into this pot, providing liquidity with annual withdrawal options.

The value of your retirement funds on 31 August 2024 will determine the initial allocation to the Savings Pot, capped at 10% of the fund value or R30,000, whichever is lower. Withdrawals from the Savings Pot will be subject to normal tax rates and must exceed a minimum threshold of R2,000.

3. What does this mean for SA investors?

The introduction of the Two Pot Retirement System has been met with mixed feelings within the financial industry. There are concerns regarding the potential impact on retirement success rates. Currently, only 6% of South Africans can afford to retire comfortably and granting access to retirement funds before retirement could make this worse.

On the other hand, it offers investors the possibility of accessing a portion of their retirement savings before the age of 55, which could help cover emergency expenses in a country where financial struggles are all too common. Having some access to your retirement investment without having to resign from employment may assist you in times of need. However, it is important to remember the intended purpose of your retirement investment is to provide you with an income in retirement.

While the savings component allows you access, it is prudent to guard against thinking of it as a discretionary savings account. Each time you access a savings withdrawal benefit, the amount available to provide you with an income in retirement will be reduced. In addition, that savings withdrawal benefit will be taxed and has the potential to push you into a higher tax bracket, depending on your income and the value of the withdrawal.

4. 3 Steps to take to ensure your retirement planning stays on track

Investors must take proactive steps to ensure their retirement planning stays on track under the new system. Here are some key recommendations:

• Portfolio construction: Crafting a well-thought-out financial plan is more important than ever. While maximising long-term growth is essential, the ability to withdraw a portion of your funds early might tempt you to hold a higher percentage of cash and cash equivalents. Maintain a balanced portfolio to ensure consistent growth.
• Considerations before action: With the introduction of the “Savings Pot,” there might be a temptation to allocate these funds to low-risk income assets. However, it’s crucial to view your portfolio as a whole rather than in isolation. A balanced approach, with exposure to growth assets like equities, is essential to avoid reducing your annual growth potential.
• Preventing future issues: Staying informed and seeking expert advice is key to navigating the opportunities and challenges of the Two-Pot Retirement System. The government may alter the rules again as more is learned about the system’s impact, so staying updated is crucial.

South Africa’s Two Pot Retirement System presents both opportunities and challenges. While it offers liquidity for emergencies, it also necessitates careful planning to ensure sufficient retirement savings.