- South Africa is about to introduce a “two pot” system for pensions.
- The new approach aims to give you access to your retirement savings in an emergency, while preventing people from quitting get their hands on their pension money.
- The two-pot system could be in place in 2023, but don’t believe it until you see it.
- You probably won’t have access to the money you’ve already saved for your retirement.
- For more stories, go to www.BusinessInsider.co.za.
South Africa must now move to a “two-pot” system for pension savings in 2023, the National Treasury announced this week.
The calendar is “optimistic”, he admits. But after many years of discussion – and then some urgency brought on by the pandemic – the overall policy approach seems to have been established.
This means we have a pretty good idea of how the new system of annual retirement savings withdrawals will work, unless things change drastically while the bill is before Parliament.
Here’s what you need to know about the two-pot system for pension money, which will likely be in place next year.
The government doesn’t want you to quit just to get your pension money.
South Africans have been known to quit just to get their hands on what can be a significant sum of money in a retirement pension. This has a high cost in the taxes that apply to the withdrawal of these savings and worries the government for reasons such as people wasting pension money leaving more people more dependent on government support after the retirement.
Covid-19 helped push the idea forward, and it’s intended to help in similar situations in the future.
When the pandemic hit, people found themselves short of money for a variety of reasons, including salaries that suddenly went unpaid. Faced with a pretty serious emergency, they still couldn’t access their retirement savings without doing something drastic like quitting. Even then, it would take time to access the money.
Had it been in place, the two-pot system would have helped in this situation, Treasury says, and it will be designed as such. This should mean quick access to cash, within a month or less, and access to enough money to cover expenses for at least a few months.
The phrase “two pots” refers to saving for emergencies alongside retirement
The change aims to make pension funds a broader vehicle where you save for both retirement and emergencies – like a pandemic that suddenly shuts down an employer.
The idea is that you will have two piles of money, one that you still cannot access until retirement age and one that you can get your hands on if you have to, within certain limits.
You could simply save for emergencies using a different vehicle, such as regular investments in unit trusts. But retirement savings come with some really great tax breaks, and you’ll take full advantage of them in both pots of money.
Your newly invested money will be split, with two-thirds locked in – with a cap…
The current proposal will see a specific allocation to each kitty: two-thirds to standard retirement savings, and one-third to the “savings kitty”.
The tax deduction rules will remain the same as now, but there will be a limit to the amount of money you can save. Anything over R350,000 a year, or 27.5% of taxable income, will have to go into the pension pot.
… but you probably won’t be able to tap into your accumulated savings
The discussion around the two-pot system has seen a strong push, from unions, to open up savings prior to withdrawals. In its simplest form, this would see all the pension money you’ve collected so far divided as new contributions are made, with two-thirds remaining locked in until retirement and the other third party available for emergency use.
The government is deeply against it, for reasons ranging from strictly technical to almost apocalyptic, as South Africans simultaneously jostle for their money.
The idea of allowing access to accumulated savings is not dead until the legislative process is complete – but that seems highly unlikely.
If so, nothing will change for the money you have already saved.
If access to accumulated funds is not granted, nothing will change for your existing savings. You will still have access to all that money if you quit, for example, and no rules that currently apply to that money should change.
This means that you can keep this “earned pot” when changing jobs. If you quit a job but choose not to access the money, you can transfer it to a new pension fund and get it back the next time you quit.
You will receive one withdrawal per year – and you will be fully taxed on it
The plan is for one – and only one – chance to cash out each year. If you take out too little or face another emergency, you’re out of luck. (Although you may be able to borrow against next year’s withdrawal, at a cost, by securing a loan against your ability to access the savings pot after 12 months.)
The money you withdraw will not receive any special tax treatment. It will be added to your taxable income and you will have to pay tax on it like on other income, even though it pushes you into a higher tax bracket, which means you owe more tax on everything. money you earn that year. .
There is no maximum withdrawal, just a minimum of R2,000
As it stands, you will be able to withdraw your entire pot each year. You cannot, however, make too small a withdrawal; the minimum will be set at R2,000. It also means you’ll need to contribute at least R6,000 before you can access any money, of which R4,000 must go into the pension pot under the two-thirds rule.
How you spend the money is up to you
Ideally, many decision makers would like the money in the savings jar to be used only for emergencies, or perhaps as a deposit to buy a house. But everyone seems convinced that the paperwork involved in only authorizing withdrawals for a specific purpose – and then checking that the money is being spent correctly – simply cannot be handled.
As it stands, you will receive money in your bank account, and what you do with it is entirely up to you.
In retirement you can throw it all in a jar
When you reach retirement age, you can withdraw the money from the savings pot, but it will be taxed as retirement capital. You can, instead, throw some or all of the savings money into the retirement pot and use it all to buy a retirement annuity that is paid monthly, allowing you to save on tax.
If you leave SA and stay out, you will have access to all the money
Retirement savings – from both pots – will be payable if you cease to be a South African tax resident for at least three years.
Such a withdrawal is subject to tax, as it would be now.
The whole thing is a bit tricky, for unavoidable reasons
Retirement savings were always meant to be inaccessible. The deal was that you would save for retirement and lock that money in tightly, and in return you would get tax relief that would amount to a lot of free money, over time.
Today, a cash withdrawal system is being adapted to the already complex systems used for retirement savings.
Pension funds will have to adjust their rules, and there are fears that a sudden rush by members to get their hands on the money could cause liquidity problems, forcing funds to sell long-term investments at prices that are not ideal.
This may mean adjustments and changes to how withdrawals work, either to ease administration or to prevent the “perverse outcomes” the Treasury fears, if South Africans find loopholes and exploit them.
We don’t know exactly when the new system will really, fully be in place, although split savings are due from March 2023
The comment period for the draft approach on the two-pot system ends at the end of August – but there’s a long way to go after that. The approach must be discussed by at least one committee of parliament before it can be submitted to the full legislature for consideration. It’s unclear how much back and forth there might be before finalization.
Once the law changes, there remains the small problem of setting up the actual systems and documents for withdrawals.
The rough plan is to have the two-pot approach operational in 2023, but believe it when you see it.
It is possible that the splitting of savings into two pots will be operational in March 2023, as planned, while withdrawals are still not technically feasible.