Proposed new 'two-pot' retirement rules which will allow one withdrawal per year from your pension
This is what you need to know about the proposed 'two-pot' retirement rule and a financial advisor looks at whether it is advisable to make a withdrawal from your retirement savings.
On 31 July, the South African government announced the proposal of a “two-pot” retirement system.
The proposed system will allow people to save for non-retirement purposes (e.g. emergencies) via their retirement funds and access one third of their retirement savings when needed.
You can withdraw money once a year, as long as there is money in the savings pot.
"These amendments aim to encourage members to preserve their retirement savings by making it more flexible to accommodate unforeseen pressures that members face during the span of their working life. It makes it possible for workers not to resign from their employment merely to access their retirement funds and would have assisted members during a crisis like the COVID-19 pandemic, when many employees faced reduced salaries or were not paid at all during that time," states the South African government website.
The Actuarial Society of South Africa estimates that a two-pot system would triple retirement savings in South Africa. Wayne Paries, a Certified Financial Planner at SWI Financial Consultants, shares his view on the matter.
"It is difficult to agree or disagree with estimate made by the Actuarial Society of South Africa as the question or statement made does not mention over what period these projections are calculated. One must consider that based on the current draft legislation of the Two-Pot system, all contributions and growth that has been accumulated before 1 March 2023 will be vested rights for members. The vested pot i.e. the portion prior to 1 March 2023 will continue to operate under the rules that were in place before the implementation of 1 March 2023. In addition to vested rights of members, there is no compulsory enrolment, i.e. Employers are not compelled to implement a retirement funding solution for their staff and in fact employees lack often the appetite to contribute to retirement funding."
What should people consider before taking money out of their retirement fund?
"Consideration should be given to the fact that one can only save while your earning. If for example one starts working at age 25 and retires at age 60, one only has 35 years to save enough money to fund your retirement years (i.e. 20 years if funding is required to age 80)," says the expert.
"Everyone talks about the impact of compound Interest on an investment but the underpinning factor for compound interest is the time you remain invested. So one should carefully consider the impact of taking money out of Retirement Fund prior to retirement would have on the amount of money you will have accumulated when you retire to fund the income you require after your retire," he adds.
The financial advisor says it is also important to consider tax.
"One would also need to consider the amount of tax that will be deducted when taking money out of a Retirement Fund. There is a higher rate of tax payable when one resigns compares to when one retires."
The government has called on citizens to comment on the proposed draft by 29 August 2022.
Image courtesy of iStock/ @Rafmaster
Image/ @Wayne Paries