Introduction
It is likely that few current employees who are members of a pension and/or provident fund and new entrants to the job market fully understand the implications and benefits of the new “two-pot” retirement system. This article is an attempt to explain the new system which aims to modernise and enhance the flexibility of retirement savings.
The image of this article reflects “three pots” but the new system essentially will divide members’ benefits into two separate pots – a savings pot and a retirement pot.
The implementation of the two-pot retirement system, set to take effect from 1 September 2024, introduces a significant shift in how retirement contributions are managed and accessed. Refer Pensions Funds Amendment Bill.
Here’s a detailed breakdown of how this system will operate and the implications for members:
Structure of the Two-Pot System
- Savings Pot:
- Allocation: One-third of the member’s (and/or employer’s) monthly retirement fund contributions.
- Access: Members can withdraw a ‘savings withdrawal benefit’ from this pot once every tax year without needing to terminate their service.
- Purpose: Provides liquidity and flexibility, allowing members to access funds for emergencies or other needs before retirement.
- Retirement Pot:
- Allocation: Two-thirds of the monthly retirement fund contributions.
- Access: Funds in this pot are preserved until the member reaches retirement age.
- Purpose: Ensures that a substantial portion of contributions is strictly saved for retirement, promoting long-term financial security.
- Vested Pot:
- Composition: Consists of all accumulated savings up to 31 August 2024.
- Access: Governed by the rules applicable before the implementation of the two-pot system, ensuring that members’ pre-existing savings are not affected by the new system.
- Purpose: Maintains the integrity of existing savings and ensures a smooth transition into the new system.
Implications to Members
- Flexibility and Liquidity:
- Annual Withdrawal: This provision supports members in managing unexpected financial needs while still keeping the bulk of their savings for retirement
- Immediate Access: The Savings Pot allows members to access part of their retirement savings annually without the need to resign or retire, offering greater financial flexibility.
- Long-Term Savings Security:
- Preservation of Funds: By allocating two-thirds of contributions to the Retirement Pot, the system ensures that the majority of the retirement savings remain untouched until retirement.
- Structured Savings: This dual approach balances immediate financial needs with long-term savings goalsand ensures continuity.
- Transition and Stability:
- Vested Pot Protection: Savings accumulated before the new system’s implementation are preserved under the Vested Pot, ensuring that members do not lose or have reduced access to their previously accumulated savings.
- Smooth Transition: The clear demarcation between pre- and post-implementation savings helps avoid confusion and ensures continuity.
Legal and Administrative Considerations
- Divorce Proceedings
- Access Restrictions: The requirement for non-member spouse consent during ongoing divorce proceedings aims to protect the non-member spouse’s potential claims.
- Complexity in Marital Regimes: Clarification is needed on how this intersects with different marital regimes, especially for those married out of community of property with exclusions.
- Pending Proceedings: It must be determined whether these consent requirements apply only to new divorce proceedings or include those already underway by 1 September 2024.
- Fund Administration
- System Adaptation: Retirement funds must adapt their systems to manage contributions into two separate pots and facilitate the annual withdrawals from the Savings Pot.
- Compliance and Communication: Clear communication with members regarding the new rules, withdrawal processes, and the implications of the two-pot system is essential for smooth implementation.
Conclusion
The two-pot retirement system offers a balanced approach to managing retirement savings by providing liquidity through the Savings Pot while securing long-term savings in the Retirement Pot. The inclusion of a Vested Pot ensures a smooth transition and protects existing savings. However, the success of this system hinges on clear regulatory guidelines, especially concerning divorce proceedings and the administration of the funds. As the implementation date approaches, continued engagement with stakeholders and detailed guidance will be crucial to address any uncertainties and ensure effective adoption of the new system.
Resources:
Pensions Funds Amendment Bill
Sanlamonline.co.za
Momentum.co.za
