The Two-Pot Retirement System: Shrewd or Misguided?

The average person spends around 90 000 hours of their life working. That’s just over 10 years or 3 750 days or, in other words, a third of their lifetime. For many South Africans, retirement is far out of reach.

The 10X Retirement Reality Report states that of the 5.2 million South Africans aged 60 and older, 3.8 million (73%) are recipients of social grants, 2% of the respondents who were retirees had stated that they had already ran out of funds and are thus either relying on state or family support. This data was sourced from a report by Statistics South Africa titled Marginalised Groups Series VI: The Social Profile of Older Persons, 2017–2021.

Despite the average retirement age for South Africans sitting at 60, less than 10% have enough savings or pension money to retire comfortably, according to chapter five of the 10X Retirement Reality Report. The 10X Retirement Reality Report 2023/2024 found that there is a significant number of people that have not planned for retirement (69%). It’s clear that even for those who are able to contribute to their retirement, South Africa’s retirement fund system is failing to provide for the needs of most who depend on it.

In 2023, the Mercer CFA Institute Global Pension Index gave the country a C grade, listing it as having a pension system “that has some good features but also has major risks and/or shortcomings that should be addressed; without these improvements, its efficacy and/or long-term sustainability can be questioned”.

We can fully expect this situation to worsen for most South Africans as they face increasing strain on their wallets as a result of record high inflation, soaring costs of goods and services, and a stagnating wage environment. This means that fewer people have the financial means to save for retirement after paying their basic household living expenses.

What is the two-pot system?

To understand its impact, we must first understand what the proposed retirement system is. The new regulation is set to be enacted in September 2024 and will divide all pension contributions into two separate pots - one for savings and the other for retirement.

A third of all contributions will be allocated to the savings pot and the remaining two thirds will be allocated to retirement. Essentially, the aim is to provide fund members with greater control over their retirement funds and address the need for early access to retirement funds for emergencies by enabling them to make one single taxable withdrawal per year from their savings pot.

This is only possible once a member’s balance has reached the minimum threshold of R2 000 and the facility is meant to act as a safety net when faced with difficult or dire financial circumstances. According to the proposal, any withdrawals made from the savings pot will be taxed as part of the fund member’s taxable income while the retirement pot is only accessible upon retirement or in the event of death.

If implemented, what will it mean for every day South Africans?

At the moment, South Africa’s current retirement system allows pension or provident fund members to withdraw the entire balance of their savings when they leave their job. While this might be necessary when an employee has been dismissed from their employment or even retrenched, many South Africans are opting to take advantage of this capability even when they don’t really need to.

This is leaving a lot of people with nothing or very little to turn to when they eventually do retire. As such, the newly proposed system will make positive changes in safeguarding financial security within the country - making sure that South Africans are able to access emergency funds without squandering their entire pension.

However, there are still some questions that need to be answered when it comes to this new two-pot system, if it is to truly be effective and successful. For instance, there is still no clarity on the treatment of, and access to, the retirement pot under circumstances of retrenchment. Although the latest draft rule amendments published for comment proposes that National Treasury deal with withdrawals after retrenchment in order to ensure access to retirement savings is a last resort, this has not been finalised.

In addition to this, the South African Revenue Service has noted that it needs at least six months after the promulgation of legislation to put the required systems in place that will enable withdrawals from the savings pot and apply the correct tax rate to that withdrawal. Meanwhile, retirement funds need time to communicate the new rules to their members and changes to their rules can only be submitted to the Financial Sector Conduct Authority for approval once parliament has enacted the Pension Funds Amendment Bill and the Revenue Laws Amendment Bill - the former of which has not been tabled before parliament as yet. This means that for many South Africans, it may be a long while before they can realise the full benefit of this new legislation.

Retirement savings are one of the most effective tools in ensuring financial stability and resilience. That’s why it is vital that we empower South Africans with tools and education needed to build long-term sustainable retirement savings, while also providing them with the ability to withstand and recover from unexpected financial shocks. The new two-pot retirement system is a step in the right direction for South Africans being able to retire more comfortably but with a practical view to mitigate short-term economic strain.

For more information, have a look at the 10X Two-Pot Retirement System brochure.