While the two-pot retirement system will come into effect on September 1, 2024, after the Pension Laws Amendment Bill was signed by President Cyril Ramaphosa, there are a few myths related to this new retirement system that need to cleared up.
According to the legislation, retirement savings accumulated to September 1 will go into a “vested component”, which will not be subject to the new rules.
The two pots refer to how the money will be allocated from September 1, which is the savings pot and retirement pot.
One third of a person’s pension fund contributions will flow into the “savings component”, while the other two thirds will go into the “retirement component”.
According to Gontse Tsatsi, head of Retail Clients, Old Mutual Investment Group, the savings pot will receive once-off “seed capital” from the vested pot of 10% of savings to a maximum of R30,000.
Tstatsi said that everything saved in a pension fund until September 1, 2024, except for the seed capital, will be treated as it was in the past and will be governed by the current Pension Funds Act and Fund Rules.
“From September 1, the new system will allow people to access what they have accumulated in the savings pot once a year and investors will not have access to the retirement pot until retirement”.
Tsatsi said that the purpose of the new system was to allow South Africans to save enough for a comfortable retirement by preventing them from cashing in all their savings each time they move between jobs.
However, there are several myths about the new system circulating that need to be need to be debunked.
Myth 1: I am finally going to get my pension money
According to Tsatsi, people will only have access to the money in the savings pot including the seed capital of up to R30,000 before tax at marginal rate.
Tsatsi said that the act makes this provision so that investors can access their retirement funds annually in case of an emergency.
However, investors should avoid making a habit of using their retirement fund for emergencies, as all your pension assets should ideally be used for retirement.
Myth 2: I can still access my pension money if I resign?
If you resign, you will only have access to the funds that are in the vested component (from original retirement savings before the Act is effective on September 1, 2024) as well as those in the savings pot (post September 1, 2024).
“Money accumulated in the retirement pot after September 1, 2024 will not be available to you if you resign and change jobs,” Tsatsi said.
“Also remember that if you resign and deplete your component and savings pot, you will have only retirement pot in the future.”
Myth 3: There will be no taxes or charges on my withdrawals
There will be a flat administration fee on once-yearly withdrawals from the savings pot, however, the major “cost” will come from the taxman.
“The withdrawal will be taxed at your marginal tax rate. For example, if you withdraw R30,000 and your marginal tax rate is 26%, the pension fund will deduct tax of R7,800,” Tsatsi said.
Tsatsi said that this means that you lose the tax benefit from retirement savings.
Myth 4: I can withdraw money any time
People can only make a withdrawal from their savings pot only once a year.
“National Treasury initially envisaged the savings pot to be used for emergencies, but the final legislation does not stipulate what the money can or cannot be used for,” Tsatsi said.
Withdrawals must be a minimum of R2,000 before tax, and once a year refers to the tax year, which is March 1 to February 28 of the following year.
Myth 5: My pension fund will be a great vehicle for financial emergencies
Tsatsi said that the money in the savings pot may be useful in an emergency like losing your job or undergoing an expensive medical procedure, but this route should only be used as a last resort.
If you are interested in withdrawing from your savings pot, you should seek advice from a qualified financial adviser who can help you plan for the short and long term is important.
“Constant withdrawals from it means that one’s lump sum at retirement is depleted and about a third of the life savings will not enjoy the benefits of investment growth and compounding,” Tsatsi warned.
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