The newly proposed “two pot” pension system will offer South Africans the best of both worlds, say Robert Driman and Armand Swart of Workman’s Lawyers.
The new pension system will give people early access to part of their pension funds, while leaving a large part for their retirement.
The changes will take effect from March 2024. However, no further draft legislation was published in February, leading to concerns that industry players will not have enough time to implement changes before the deadline.
Driman and Swards looked at what South Africans need to know about the proposed system and its current status.
What is it?
In 2022, Finance Minister Enoch Godongwana published the Bill to Amend Income Laws proposing major changes to the current pension system, replacing the one-pot system with a two-pot system.
The new two-pot system has consequences for pension funds, pension savings, provident funds, provident funds and annuity funds (the Funds).
There will be a “piggy bank” and a “pension pot” where members of the Funds can withdraw money from the piggy bank while the pension pot remains untouched.
What happens to previous savings?
The pension funds that exist prior to the implementation of the two-pot system will be placed in an “acquired pot”. Funds in vested pool will still be subject to existing laws.
After the introduction of the two-pot system, contributions can no longer be made to the vesting fund, except for participants of the provident fund who were 55 years or older on March 1, 2021, as their pension scheme remains unchanged.
How are contributions distributed?
The piggy bank may amount to a maximum of one third of the pension premium of a fund participant.
While at least two-thirds of the contributions are allocated to the pension pot.
Any premiums that are not allocated to the piggy bank are allocated to the pension pot.
How do recordings work?
Fund members are only allowed to withdraw from the pot once every 12 months, with a minimum value of R2,000.
The pension fund does not allow withdrawals.
At the time of retirement, the available money in a piggy bank is paid out in one go.
Whereby, upon retirement, the accumulated money in the pension pot must be used to purchase a retirement annuity, subject to the minimum threshold amount required to purchase an annuity.
The advantage of two pots
Fund participants currently only have access to their pension fund or provident fund when they retire or leave employment.
The National Treasury has looked at reasons for introducing the two-pot system.
First, a fund member may need access to their funds for a specific issue. Upon dismissal, they would have full access to their funds, jeopardizing their long-term savings.
Secondly, there are fund participants who are in financial distress and cannot access their assets in mutual funds.
Fund members may need additional money immediately, but will only have access to it if they resign themselves.
Covid-19 lockdowns exposed the flaws of the current system as many fund members were in financial distress but unable to access their retirement funds without resigning or through other shams such as divorce.
The new system provides a lifeline for fund members in financial distress while ensuring that they keep the bulk of their retirement savings, Werksmans said.
Possible problems
While the new system should have a positive effect on fund participants, it will create an administrative burden for the funds.
Funds will have to adjust their rules, introduce new complicated systems, train employees and educate fund members.
Funds will also suffer from direct involvement in the current system, where fund members can file claims in lieu of their employers.
In addition, all fund members will have to bear an additional cost.
In addition, funds and their administrators have a short time to prepare for the introduction of the two-pot system.
National Treasury said the first phase of legislative changes for the two-pot system would take place from March 1, 2024, but did not provide any other draft legislation for comment, which many in the industry expected.
National Treasury said three areas requiring additional work — a seed capital proposal, legislative mechanisms to include defined benefit funds equitably and old pension funds — will be addressed in the draft legislation.
Another area that needs more attention – withdrawals from the pension part if someone is cut back and has no alternative source of income – will be reviewed in the second phase of the implementation of the two-pot pension system.
National Treasury’s comments imply that implementation will be in two phases, resulting in complicated piecemeal legislation.
Closing remarks
Despite the increased administrative burden, the new two-pot system seems to be widely welcomed.
Driman and Swards said the new system will give fund members the flexibility to access a portion of their retirement funds while still safeguarding a retirement fund’s purpose.
However, they added that the delay in further legislation is putting industry players under extreme pressure.
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