Saving for the future

Wednesday, September 7, 2022

Efforts to reform South Africa’s complicated retirement savings landscape are forging ahead with the aim to ensure better retirement outcomes in the future.

In July, National Treasury released the 2022 Draft Revenue Laws Amendment Bill, which was among the four draft tax bills released for public comment.

The 2022 Draft Revenue Laws Amendment Bill contains key amendments on retirement reform that will move the country towards a two-pot retirement system. Under this system, South Africans will be able to save for non-retirement purposes such as emergencies using their retirement funds while preserving more of their savings for retirement.

The aim of the amendments is to encourage members of retirement funds to preserve their retirement savings by making it more flexible to accommodate unforeseen pressures that members may face during the span of their working life.

Through the two-pot system, workers will not need to resign from their employment in order to gain access to their retirement funds.

Currently there are different types of retirement fund vehicles available to individuals that include pension funds, provident funds, retirement annuity funds and pension preservation funds, among others. These have different accessibility rules to savings and different tax treatment historically.

From 2012, the country’s retirement fund regime has been undergoing fundamental reforms, including increased preservation at retirement through annuitisation which was effective from March 2021 and the creation of tax free savings accounts for individuals from 1 March 2015.

Head of research, best practice and academy at Alexforbes, Vickie Lange, says all the reforms to date have made a positive impact.

“The reforms to date have all contributed to improvements in retirement outcomes for members, and the two-pot system takes this further by enabling more meaningful improvements in outcomes. For example, a new member joining under the two-pot system could expect retirement outcomes to be 2 to 2.5 times better on average, relative to the current regime.”


The amendments in the draft bill seek to implement the remaining pre-retirement preservation proposal, as part of government’s longer-term retirement reform project. This as Treasury has expressed concern with the current design of the retirement system as individuals can access their pension funds and provident funds in full, when changing or leaving jobs.

In some cases, this creates an incentive for individuals to leave employment to gain access to the money in the short term and endangering their long-term retirement savings.

Another concern expressed is that some families in financial distress have assets within their retirement funds that are not accessible, even in the case of emergencies, an issue that has become more prominent since the outbreak of COVID-19.

There had been calls for financially distressed individuals to have some level of access to their retirement funds as a way of alleviating  the financial hardships.

 The bill of which public comment was being sought until 29 August 2022, has its roots in a discussion document published by government in December 2021 which proposed  a new regime addressing the two concerns raised.

How it will work

The two-pot system will allow individuals to contribute to a one-third “savings pot” which will be accessible without one having to change their employment status and a two-third “retirement pot” which must be preserved until one retires.

This then in turn allows resources to be available when needed but also increases the overall level of savings dedicated to retirement.

Partner and tax specialist at Webber Wentzel, Joon Chong, points out that the two-pot system provides a better alternative to one where people have to resign their jobs in order to access their pensions or provident funds.

“[This is] because it would allow members of retirement funds to access one-third of their pension savings once a year. That would help them through financial emergencies, while preserving the other two-thirds for retirement,” says Chong.

One may also wonder just far financial distress runs among workers.

“The financial pressure is evident. According to the Alexforbes Member Insights analysis, the average debt to income ratio is about 69%, with about 20% of millennials at risk of defaulting on loans.

“This is one of the reasons why the solution for South Africans needs to help balance long-term retirement savings goals and to meet short-term financial needs. However, it will still be important for members to also save outside of a retirement fund for short-term financial needs, as the retirement savings should only be accessed before retirement as a last resort,” notes Lange.

The Member Insights analysis uses data from all local retirement funds that Alexforbes administers.

Government consulted widely on the matter with fund administrators, labour unions and other experts, before finalising the draft legislative proposals. It also takes into cognisance that in allowing for a withdrawal option, many funds may face liquidity risks on implementation.

It also recognises that any new system will take time to implement, as this requires changes to systems and fund rules and will mean that funds will face new and higher costs. If the bill is passed into law, it is expected to come into effect on 1 March 2023.

However, the proposals in the bill does not allow immediate access to retirement funds, but rather to a system that can more satisfactorily cater for emergencies in the future but also should increase preservation to improve retirement outcomes.

The policy proposals are that all pension funds, pension preservation funds, provident funds, provident preservation funds or retirement annuity will allocate contributions from March 2023 to a new “retirement pot” and a “savings pot”.

Under this regime, existing members will not have to re-enrol for funds for the new two-pot system. This as existing funds will be adapted to accommodate both components into the fund where each fund will have to review their fund rules.

Webber Wentzel explains that members that have a longer standing in retirement funds will essentially have three pots - namely the vested pot that contains amounts accumulated before the implementation date, the savings pot and the retirement pot, which has to be preserved until retirement.

Following the date of implementation, members’ contributions will be split into the two pots by the fund.

The “savings pot” will then be accumulated from 1 March 2023.

Chong however expresses concern that the “vested pot” will remain fully accessible to workers.

“The ‘vested pot’ which are existing vested rights or interests in pension and provident funds on implementation date, however, remain fully accessible on resignation. The vested pot conditions remain unchanged on implementation date. Therefore, while the two-pot system allows once a year withdrawal, practically, the savings pot will still take time to accumulate.

“We remain concerned that the vested pot will be considered more attractive (and therefore still prompt resignation) relative to the savings pot withdrawals, as the savings pot withdrawal is taxed at marginal rates (highest of 45%) whereas the vested pot is taxed at lump sum rates (highest of 36%),” explains Chong.

However, Lange is of the view that the country is on the right track with its retirement reforms efforts.

“Yes, all reforms have contributed to improving retirement outcomes, with the two-pot system being a very important component in the reforms to meaningfully improve outcomes, as it will address the issue of poor preservation. Only 9% of members currently preserve their retirement savings when changing jobs, and this leads to poor retirement outcomes, with the average replacement ratio of only 31%,” says Lange.

Lange also has advice for those who have already withdrawn funds from their pension funds.

“Members will have to save more to their retirement funds to make up for the withdrawn amounts, if they want to achieve a good retirement outcome. In practice, this is difficult for most members to do. This is why it is also a good idea to save outside of a retirement fund for short-term financial goals and needs, so that the retirement savings is there when you need it in retirement,” she says. –