Allowing financially stretched fund members to withdraw a limited amount of money from their pension savings from what's known as a savings pot, the two-pot system offers benefits to employees across a multitude of sectors. For the hospitality and leisure industry, which has a relatively high staff turnover rate, the system may facilitate access to emergency pension funds without the need to resign.
Set to be implemented on 1 September 2024, South African retirement plans will have a new feature: the two-pot system. This system will allow certain members of retirement funds, to access a savings pot (once per tax year) that will, on the implementation date, hold 10% of their retirement fund capital, capped at ZAR 30 000, and thereafter one-third of all retirement fund contributions going forward. Upon doing so, they will be taxed at their marginal tax rate.
The system also enforces long-term preservation of the remaining two-thirds of retirement fund contributions from 1 September 2024 into a retirement pot, which ensures that there will be savings available at retirement.
This reform is particularly helpful for industries with high staff turnover, like hospitality. Previously, employees would leave their jobs just to access retirement savings, often to access cash to service debts. Now, they would be able to access their savings pot without resigning. Whilst the access to the savings pot may not significantly reduce members' debt, it will allow them to access their savings pot once a tax year (subject to tax), which may in turn reduce the current trend of job hopping in the industry.
The thinking behind the two-pot system
The rationale for the two-pot has its roots in the COVID-19 pandemic, when many people struggled financially without access to emergency funds. This system, proposed by government, provided a way for people to get access to a source of finance quickly, whilst seeking to ensure members of retirement funds are forced to save a substantial portion of their retirement savings to retirement. One of the hardest hit sectors during the pandemic, hospitality, felt this need acutely, leaving those working in the industry desperately seeking ways to access alternative income sources.
Over the COVID pandemic and even today, employees across sectors are over-indebted. Loans and similar products may not be an alternative for them. The hospitality sector, where many lost their jobs, is still recovering. Now, many of those who are employed or re-employed are still grappling with the consequences of the personal financial hardships and loan limitations that arose at the time.
The second motivating factor was to encourage people to save because many employees across sectors continue to resign to get access to those funds in the current challenging economic climate. There has been much talk around the fact that most South Africans don't save for retirement, or they don't save enough for retirement. This is therefore a way that the government saw to force people to save because the retirement pot which will be two thirds of your contributions from the implementation date is only accessible on retirement. This access will only be through annuities, so employees won't have access to that lump sum even if you leave employment during that time.
Legislation
While there has been much debate around the two-pot implementation date, which has been changed numerous times, National Treasury has indicated that the two-pot system will be implemented on 1 September 2024. The Revenue Laws Amendment Bill is currently waiting for the President to sign it into law, and the Pension Funds Amendment Bill, which now includes funds not governed by the Pension Funds Act, has been approved by the National Assembly and has been adopted by the Select Committee on Finance in the National Council of Provinces.
Whilst the final legislation has not been received yet, stakeholders within the industry are gearing up for the implementation of the two-pot system, with member education being the most important step in the process. It is important for members to be educated that whilst there is a provision for 10% seeding from the current retirement savings into the savings pot, many members may not be able to withdraw funds on 1 September 2024, since their seeded amount may be too small, considering that a minimum withdrawal of ZAR 2 000 is required. For example, where a member has ZAR 19 000 as their current retirement savings – 10% of ZAR 19 000 will be seeded to the savings pot, ie R1 900, therefore the member will be unable to withdraw from their savings pot, until it has grown above R2 000.
Members would accordingly be required to be properly educated on the entire two-pot system, in a manner that they are able to fully understand the implementation and the workings of the system as well as the "cans and cannots" and consequences of withdrawal from the savings pot.
