Exploring the grey areas of South Africa's Two-Pot Pension System

As South Africa embarks on a journey of pension reform with the advent of the two-pot system, both anticipation and apprehension swirl among individuals contemplating their financial futures.?

The system aims to strike a balance between accessibility and enforced preservation. However, there are several nuanced aspects that merit deeper examination amidst the sea of information available. While the system's prominent features have received much attention, it's the lesser-known elements that demand our attention.?

The process of seeding the savings pot has been extensively discussed. In the budget speech Mr Gondowana said that government expects to earn R5bn in taxes from members withdrawing their savings pot from 1 September 2024 to 28 February 2025. At an average tax rate of 25% that means government is expecting withdrawals of around R20bn in the 7-month period.??

The current discussion of the assets management space is how to invest member savings pots. If the expectation is that member will withdraw the savings it will be wise to invest the savings pot more conservatively.???

However, there is another side of the savings pot coin. What about the member who does not want to withdraw their savings pot? It is highly unlikely that members will transfer their savings pot back into their retirement pot in order to get a better investment return. So, what should asset consultants and trustees do??

Not enough consideration has been given to the potential negative implications of members that don’t withdraw their savings pots. If the savings pot is invested more conservatively this could have an adverse effect of growth for members who don’t withdraw every year. This question remains largely unaddressed and poses a significant challenge to ensuring optimal asset allocation for members.?

Another point of contention centers on the growth trajectory of the savings pot. Should there be a cap on contributions, akin to the limits imposed on Tax-Free Savings Accounts? Implementing an upper limit could prompt a shift in focus towards the retirement pot once the threshold is reached. Upon retirement member will be allowed to take cash from their savings pot so having a cap on the savings pot would be very unpopular and restrictive. The only real solution would be to allow member choice in how the savings pot gets invested. This poses a new problem as members often get paralysed by fear when needing to make these decisions.??

Further concerns arise regarding the administrative procedures surrounding withdrawals from the savings pot. It is unclear whether Human Resources (HR) departments be involved, or if members can navigate the process independently. While industry discussions suggest HR involvement may not be necessary, clarity on this matter is essential to ensure a seamless claims process for members.??

Furthermore, the tax implications of withdrawals present a significant challenge. If a withdrawal pushes a member into a higher tax bracket, adjustments to payroll deductions become imperative. Without proactive measures, members may be blindsided by unexpected tax liabilities by the time they file their tax return.? There is no provision for counselling or seeing an advisor in the current legislation, but it might be wise for funds to provide guidance to members when their savings pot is significant.??

Pension backed home loans could also be negatively affected. What happens if a members’ home loan is drawn to the maximum of 65% of fund balance? Will that member be excluded from having a savings pot on 1 September 2024? If so, will they be allowed to contribute to their savings pot from 1 October? I have not seen any comments on how funds and administrators should handle situations like these.???

In navigating these uncertainties, effective communication, comprehensive guidelines, and proactive solutions are essential. With deadlines looming and the urgency of implementation pressing, relying solely on regulatory guidance may prove inadequate.?

For further discussion on other grey areas or to share insights, drop us a comment. Together, let's navigate the complexities of pension reform and empower individuals to make informed decisions about their financial well-being.?

Written by:

Jaco Wasserfall

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