Dispelling 6 misperceptions of Two-pot retirement systmem

Emphasising the need for thorough preparation and enhanced financial literacy initiatives to ensure a successful transition to the new system. Picture: Pexels.

Emphasising the need for thorough preparation and enhanced financial literacy initiatives to ensure a successful transition to the new system. Picture: Pexels.

Published May 27, 2024


South Africa is poised to embrace the Two-Pot Retirement System, the most extensive changes in retirement legislation since the annuitisation of provident funds in 2017 known as T-Day, according to Blessing Utete, Managing Executive of Old Mutual Corporate Consultants.

Feedback gathered by Old Mutual Corporate from attendees of various conferences revealed that many had the same questions or concerns about the practical implementation of the retirement reforms. Specific issues highlighted include the rules governing withdrawals, potential for fraud, and tax implications associated with the two-pot system.

“These concerns should not overshadow the significant benefits of the system, which include bolstering long-term financial well-being and providing more flexibility,” he says. He adds that this will be achieved by mandating the preservation of two-thirds of retirement savings for future income, while permitting limited access to one-third for urgent financial needs.

“The importance of thorough preparation and targeted member education is absolutely critical for its success, as seen by the road to retirement reforms in 2017,” he says. T-Day reforms in South Africa, also aimed at improving retirement security, were delayed in order to address concerns over implementation.

“We need to confront several misconceptions head-on and significantly ramp up employee financial literacy initiatives around retirement reforms specifically to facilitate a successful integration of the system,” says Utete.

Misperception 1: The transition to the Two-Pot system affects all members’ savings and future contributions in the same way.

Reality: For the majority of South Africans, the transition is designed to be automatic for all eligible retirement fund members, requiring no action on the part of most members. Pre-existing savings as of the effective date will automatically be allocated to the vested pot, with up to 10% of these savings, capped at R30,000, seamlessly transferred to the savings pot.

Members of provident funds who were over 55 years old as of 1 September 2024 will be the exception. Because they’re eligible for retirement, they will by default remain in their existing pension and provident fund. They will instead be given a choice to structure their savings according to the Two-Pot System and will have 12 months to make the selection.

Misperception 2: The Two-Pot Retirement System will enable individuals to access their retirement funds beginning on September 1, 2024.

Reality: Although the legislation will be in effect from 1 September, disbursements won’t commence immediately. Significant system preparations and a series of processes—such as deployment, seeding calculations, and verifications—must occur first, likely taking at least five working days before a payout.

Funds will need to communicate to members about the claims process and when they will be ready to start processing claims. A seeding calculation involves determining the initial amounts to be allocated to different "pots" or accounts based on existing retirement savings.

This calculation depends on the current amount of savings in each member's retirement account and their market value. This means that this could take several working days to weeks, depending on the rules set by the fund.

Misperception 3: Access to retirement savings under the new system must occur immediately on 1 September 2024, or members will forfeit their entitlements.

Reality: Members are not required to make any immediate decisions on whether to withdraw as of 1 September 2024. Instead, they maintain full control over their funds, with the flexibility to access their savings pot at any future point when it becomes necessary. In fact, it’s more beneficial for members to allow their savings to remain invested, thereby potentially increasing their value.

Misperception 4: The Two-Pot Retirement System will lead to underperformance of assets, reducing the long-term value of savings.

Reality: The structure of the Two-Pot System—comprising a 'retirement pot' for long-term growth and a 'savings pot' for short-term needs—is an ‘accounting exercise,’ not an asset allocation or investment strategy change. The adjustment of the Two-Pot System—dividing funds into a 'retirement pot' for long-term growth and a 'savings pot' for short-term needs—is primarily a matter of organising and categorising funds within existing financial structures. Regulation 28, which governs asset allocation, will continue to ensure diversified portfolios, mitigating risks and supporting consistent returns.

Misperception 5: The Two-Pot Retirement System introduces tax complexity.

Reality: The Two-Pot System maintains the existing taxation framework, providing straightforward guidelines to help businesses and members manage their contributions effectively.

Withdrawals from the savings pot before retirement are taxed as part of the individual's annual taxable income, calculated using their marginal tax rate. Total contributions to retirement funds still receive the significant tax-deductible status they have always received.

Misperception 6: The Two-Pot Retirement System invites fraud and corruption.

Reality: Retirement funds already employ robust measures to protect against fraud and ensure the security of members' savings and personal data. Most funds in South Africa feature advanced security protocols, including encryption and multi-factor authentication, to prevent such risks. As with any new capability, creating a new transaction capability, as introduced by the Two-Pot legislation, does mean that it will open funds to increased fraud risk.

However, it is how this risk is managed and the security measures put in place that are crucial. It is essential for members to stay vigilant and informed about potential threats, especially criminals posing as representatives of their retirement fund.

We encourage members to regularly update their security settings, verify communications from their fund administration before agreeing to withdraw any savings, and report any suspicious activities. These proactive steps can significantly enhance their security and peace of mind.

Utete urges business owners and HR managers to actively engage with the reform process and educate their workforce about the benefits of the Two-Pot System. "Preparation is essential to fully leverage the advantages of the Two-Pot System," he says.