What is “Two Pots”?
In a nutshell, the proposed Two Pot Reform aims to introduce a greater degree of preservation of money for a client’s retirement years.
Once this legislation takes effect all new contributions members make to their retirement funds (Pension Funds, Provident Funds and Retirement Annuities) will be split into so called “Two Pots”or two components.
The Savings Pot will receive 1/3rd of the member’s contributions while the Retirement Pot will receive 2/3rds. Subject to certain restrictions members may access (withdraw and incur tax) funds from their Savings Pot on an annual basis. The money in their Retirement Pot however cannot be accessed until the member’s qualifying retirement age as per the rules of the retirement fund or prevailing legislation, and must then be used to provide the member with an income for their retirement years.
There is a third pot that also comes into play called the Vested Pot that will house all retirement fund money prior to the introduction of this new legislation. This pot will be subject to “old” legislation and used to fund a portion of the Savings Pot for members to initially withdraw when the new legislation kicks in, called seeding capital. Current indications are that this seeding capital will be restricted to 10% of the fund value in the Vested Pot limited to a maximum of R 30 000. So initially there will not be a lot of money available for immediate withdrawal. Again keeping to the objective of preserving as much money as possible for retirement for members of retirement funds.
Why “Two Pots”?
The new reform came about for two reasons: To alleviate financial pressure for members of a retirement fund in the event of needing money to address financial strain and emergencies. Secondly to preserve a larger amount of money for members for their retirement years.
An area that continuously proves challenging is getting members to preserve their retirement funds for retirement each time they change employment. Too often, retirement fund members tend to cash out most of their retirement funds when changing jobs, instead of preserving the money for retirement as intended. Retirement funds are essentially designed to ensure that people have money saved up to provide for their income needs in retirement.
The Two Pot Reform should provide a happy medium here, allowing access to a portion of funds for emergencies (hopefully not holidays) annually, while ensuring a larger portion of funds remain intact to take care of retirement funding.
What’s next?
The industry as whole needs to implement major administrative and system adjustments to accommodate these changes and we do expect some initial teething issues along the way. The Regulator and the South African Revenue Services (SARS) also have their fair share of challenges ahead of this reform.
Without getting caught up in all the semantics, currently the reality is that after 1 September 2024 retirement fund legislation will change and access to retirement funds will be restricted in favor of long-term capital preservation for retirement. Having more money available for retirement can only be a good thing and should improve retirement outcomes for many retirement fund members.
For now there is not much to be done except to patiently watch and wait as the final steps are taken in Parliament to give effect to this new legislation. We look forward to 2024 and to bringing our members up to speed with all the mechanics of these new retirement pots as things progress.
Gareth van Deventer CFP®