What effect will the proposed 'two pot' reform have on SA's pension crisis?

According to the latest figures from Stats SA, only 6% of South Africans can afford to retire comfortably.
Image: Supplied/Old Mutual

Old Mutual recently released its 2022 Savings & Investment Monitor (OMSIM). This annual survey tracks the shifts in attitudes and behaviours of working metropolitan South African households to better understand their savings behaviour and financial perspectives on key financial topics.

As expected, the government’s proposed “two pot” retirement reform bill garnered a lot of attention. Called the 2022 Draft Revenue Laws Amendment Bill, it was released for public comment at the end of last month. This proposed “two pot system” will allow pension and provident fund members, as well as retirement annuity policyholders, to access a portion of their retirement savings before retirement age, without having to resign or leave their job. This accessible “pot” is indicated to be about one-third of the total savings amount. 

Under current law, pension fund savings can only be accessed early if a member resigns from the fund or changes jobs. 

According to OMSIM, reaction to the proposed pension reform is mixed, with most appreciating the improved access to savings. Only 12% showed a negative response to the proposed changes. The likelihood of taking advantage of increased access is high, even though many of those surveyed may be aware of the detrimental effects of early withdrawal from their retirement “pot”.

Retirement savings in SA

Adequate retirement savings continue to elude most South Africans. According to the latest figures from Stats SA, only 6% of South Africans can afford to retire comfortably — a dismally low figure.

With so many respondents indicating that they are likely to take advantage of the early access to funds, the big question surrounding the proposed retirement reform bill is whether this savings figure will improve or reduce even further if the proposed regulations come into effect.  

Can short-term access encourage long-term saving?

“While at first it might seem counterintuitive to make it easier for the public to access their retirement savings, it might have a positive impact in the long run,” says Shakira Bodasing, a senior legal adviser at Old Mutual.

“The reality is that so many South Africans are struggling to make ends meet, especially after Covid-19. They are resigning from their jobs so they can access their retirement savings early to cover outstanding debts such as home loans and car finance, keep policies up to date, or cater for day-to-day living expenses. This has a double-negative effect, because not only does it wipe out their retirement savings, but now they are also unemployed with only the short-term relief of their early retirement withdrawal to rely on.”

Once the two-pot system comes into effect, South Africans will not have to go to these extremes if faced with an emergency. They can start or continue to save for retirement, knowing they have access to a portion of their retirement savings if needed.

That’s what the government is hoping for, but it is a slippery slope.

“With retirement savings already so low, it’s vital that people keep their long-term financial goals in mind. Having easier access to your retirement savings should not be viewed as a backup plan, but rather a ‘last resort’ for desperate times,” says Bodasing. 

“Retirement savings is a long-term commitment; an early withdrawal can make an irreversible dent in your savings. Withdrawing from retirement savings may also have tax implications.”

The bill is still under review with the National Treasury, providing a possible effective date of March 1 2023 for the new regulations to come into effect. An exact implementation timeline is not clear yet as the draft bill is still open to public comments. 

What is known is that the changes are likely to apply only to retirement savings made after implementation and won’t apply to any existing pension fund, provident fund or retirement annuity savings. 

You are not alone — secure your future with the right advice

“The finer details of the bill remain to be seen,” says Bodasing. “Whatever happens, a financial needs analysis is key, and we urge all South Africans to speak to a financial adviser before deciding to access funds early. There will be cases where the short-term relief of early access will be justified, but the long-term impact on retirement savings cannot be underestimated.” 

As a rule of thumb, you should save enough to ensure that your retirement savings can provide an income during your retirement years that’s between 70% and 75% of your final salary before retiring. With the advice of a trusted, accredited financial adviser, chances are that there are alternative ways to keep your retirement goals on track without neglecting your current responsibilities. 

To speak to one of Old Mutual's financial advisers, call 086-060-6060 or visit Oldmutual.co.za

This article was paid for by Old Mutual.

^{The material in this article is not intended as and does not constitute financial or any other advice. The material does not take your personal financial circumstances into account. For this reason, it is recommended that you speak to an accredited financial adviser to consider all your options and draw up a plan to achieve your financial goals.}