The Two-pot retirement system

Sabir Bacus
Senior Benefit Consultant

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The imminent Two-pot retirement system and how it will affect retirement planning 

The media has been awash with articles and opinion pieces regarding the proposed Two-pot retirement system.  

In addition to the media focus on early access to retirement savings (through which Government is attempting to assist members in financial distress), it is also important to understand the balance of the draft legislation which has been introduced to limit the continuous consumption of retirement savings (in occupational pension and provident funds) each time a member exits a fund.  

A large proportion of fund members who resign before retiring opt for a cash withdrawal benefit.  The continuous cashing in of retirement savings upon resignation, over a member’s working lifespan, will see their retirement savings assets dependent only on their last membership before their retirement.  Almost always this will prove inadequate for retirement income provisions.  This is obviously exacerbated the longer one lives. 

This premature withdrawal of retirement savings is a direct contributor to the fact that only some 6% of South Africans can retire on the same or a similar standard of living as that which they enjoyed before retirement.

Not exclusively a South African problem, the world has been under immense economic pressure since the start of Covid, with many households having to endure financial distress.  A collective call from the South African public to access retirement savings before retirement was embraced and taken under consideration by the authorities.  Government has considered the question of early access to retirement savings whilst continuing to have the preservation of savings for retirement firmly in mind.  The outcome of deliberations on the combination of early access and preservation of retirement savings culminates in the proposed Two-pot retirement system.

The Two-pot system allows for one-third of future contributions plus (once-off) seeding capital to be accessed annually whilst in active employment with prerequisite T’s and C’s.  In return for the early access to retirement savings, two-thirds of future contributions must be preserved for retirement.  Hence, on resignation, this component will not be available in cash. 

Through this mechanism the ideology of simultaneously providing early access to cash and preserving retirement savings is achieved.

There is a collective concern that the original purpose of early access to retirement savings (to relieve short-term financial distress) may be misused or abused.  The draft legislation applies to all members, regardless of their financial circumstances with no means test being applied.  The exercising of the right to access retirement savings is left in the hands of a member.  Although this provides parity and easier application, it will see a continued haemorrhaging of retirement savings in favour of short-term objectives.  There is also a collective understanding that the trade-off between short-term access and compulsory long-term saving is required for this to be accepted. 

Another matter that members need to be aware of is the retirement funds investment strategy employed in the different components within the Two-pot system.  It is possible that a conservative and short-term investment solution may be offered in the savings component which may not suit longer-term investing, necessitating a transfer from the savings component into the retirement component.  Draft legislation does not provide for a reversal of such a transfer. 

Curbing unnecessary and unsubstantiated early access of retirement savings, will be necessary.  This will best be accomplished through member awareness campaigns and making this a counselling event just as resignation and retirement are. 

The resilience of retirement savings is founded on the basic principles of quantum and time.  The more one saves over a greater period, the better the expected outcome.  Although these principles are commonly known, they are equally commonly ignored.  The ease with which the Two-pot system continues to allow this erosion of fundamental compound investing, remains of concern. 

Caution, common-sense and counselling will perhaps remain a last defence against the continued erosion of retirement savings. 

Read our CEO’s editorial regarding GTC’s stance on the proposed Two-pot retirement system here.

Click here to listen to the interview with Jill Larkan on Rise FM943 on this same topic.