Extended deadline for Two-Pot Retirement System unfortunate but necessary: Old Mutual
Johannesburg - The decision by the National Treasury to delay the implementation date for the Two-Pot Retirement System from 2024 to 2025 will allow enough time for legislation to be finalised, rule amendments to be processed, and member engagement to be effected, according to Old Mutual.
Old Mutual today expressed its support for the extended deadline, following the National Treasury and SARS providing feedback at the Standing Committee on Finance on Wednesday as part of the parliamentary process. Initially scheduled for 1 March 2024, the new proposed date for implementing the Two-Pot Retirement System is 1 March 2025.
Michelle Acton, Retirement Reform Executive at Old Mutual, noted that the proposed implementation date for 1 March 2024 would not have been achievable as the legislation has not yet been finalised. It is however, critical that the legislation is finalised in the next month or two to ensure that Funds could be ready for 1 March 2025.
She underscored the importance of this extension, saying it would provide an invaluable opportunity to ensure that the new system can seamlessly process the anticipated surge in applications for access to pension savings.
"We understand that many financially strapped South Africans will be disappointed at the delay, and we call on the government to expedite the promulgation of the legislation to create certainty and to allow for access to the savings in 2025.
"This latest extension will, however, allow us to fine-tune our preparations, ensuring our customers are well-prepared for the transition and informed about the consequences of accessing their retirement savings prematurely. We encourage our clients to update their contact information to receive timely updates and crucial information regarding their retirement products."
The proposed Two-Pot Retirement System presents a significant shift in retirement savings management. Two-thirds of contributions will be channelled into a retirement pot, accessible only after normal retirement age. The remaining one-third will go into a savings pot, allowing immediate access under certain conditions.
Acton says Old Mutual has been diligently preparing for the transition to the Two-Pot Retirement System for the past 12 months. The additional time granted by the extension will provide an invaluable opportunity to pressure test their systems, integrate the SARS processes, engage with their customers, and ensure they are well informed about the forthcoming changes, the process of accessing funds, and the implications of tapping into their retirement savings before reaching retirement age.
Increase in Cap on Access
Under this system, part of the funds accumulated before its implementation could be accessed as seed capital from the savings pot, which members can withdraw from annually. Initially, the regulations indicated that the seeding would be a maximum of 10% of existing savings with a cap of R25,000.
On Wednesday, the National Treasury announced that while the seeding would remain fixed at 10%, the withdrawal cap would be increased from R25,000 to R30,000.
Acton said Old Mutual, and the broader pension fund industry welcomed the fact that seeding remained fixed at 10%, noting that the increased cap would have a minimal additional impact on pension fund liquidity.
Other Notable Confirmations
Acton noted that while the National Treasury clarified several areas of concern, the confirmation that intra-fund transfers between the savings pot, retirement pot and vested pot would be fully or partially allowed under the new system needed clarity. She said intra-fund transfers presented a significant administrative burden and called for more detail to be provided in the updated regulations.
Acton noted several issues that were clarified, including the following:
- Defined Benefit funds would be given more flexibility around calculations of the contribution split.
- Regulation 28 would not be changed, as National Treasury saw no reason to do so.
- Provident fund members over the age of 55 (as at 1 March 2021) would have the option to opt in rather than opt out of the new Two-Pot Retirement System.
- Pensioners, funds where there are no active members, closed and dormant funds and funds in liquidation would be excluded from the new system.
- Savings Pot withdrawals would be taxed on the marginal tax rate; and
- SARS would provide the marginal rate, which would be applied by the fund releasing the money.
Long Term Impact
Blessing Utete, Managing Executive of Old Mutual Corporate Consultants, said Old Mutual recognised the financial challenges many South Africans faced, with immediate access to retirement funds appearing appealing. However, the company emphasised the critical importance of considering the long-term impact on financial security in retirement when making such decisions.
"Immediate financial relief is crucial, but it should not come at the expense of one's retirement nest egg. We advise all South Africans to consult with experienced financial advisers before making any decisions related to their retirement savings, regardless of the amount involved."
Utete said that Old Mutual's data shows that, on average, most South Africans save only two to three times their annual income for retirement, this is significantly less than the required average 12 times annual income required to have an adequate income in retirement.
"By refraining from accessing their savings prematurely, they could potentially accumulate 12 times their annual salary. The Two-Pot Retirement System is designed to encourage increased savings rates and better financial security in retirement," he said.
"In a dynamic financial landscape, we remain committed to empowering our customers with the knowledge and resources to make informed financial decisions. The extended implementation date for the Two-Pot Retirement System aligns with our mission of ensuring long-term financial wellness for all South Africans," Utete concluded.