At least 20% of the country’s retirement fund members will not have enough money in their savings pot on 1 September 2024 to make a withdrawal when the two-pot retirement system comes into effect.
That’s the word from Natasha Huggett-Henchie, consulting actuary and member of the Actuarial Society of South Africa (Assa).
The two-pot retirement system will come into effect at the start of September 2024 (effectively as of Monday, 2 September), allowing some retirement fund members to access a portion of their retirement money.
Under the two-pot retirement system, a member’s contributions to a fund are split into a savings component and a retirement component. There is also a third component – the vested component – containing the fund member’s contributions up to 31 August 2024.
From the vested component, 10% or R30 000 – whichever is lower – will be allocated as a once-off seeding amount in the savings component. This seeding amount can be claimed from the beginning of September.
Assa’s Retirement Matters Committee issued a statement on Monday in which it said it surveyed some of the country’s biggest retirement fund administrators.
The survey found that the average benefit of the 20% of retirement fund members with retirement savings below R20 000 is projected to be around R9 000 on 1 September 2024.
Of this R9 000, 10% (or R900) will go into the new savings pot.
According to Huggett-Henchie, the average monthly salary of employees who fall within 20% of retirement fund members who cannot access their savings pot is R9 417. The average net retirement contribution is around 10% monthly (R942).
Starting from 1 September 2024, one-third of the monthly retirement fund contributions (R314) will go into their savings pot, where R900 is already waiting, and the rest will be allocated to the retirement pot that cannot be accessed until retirement.
Therefore, it will take around four months for these members to have a savings pot fund value above R2 000 (R900 + R314 x 4 = R2 156).
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“Many retirement fund members hoping to be able to dip into their savings before the start of the holiday season at the end of the year will be left disappointed,” says Huggett-Henchie.
“To avoid finding out in September this year that there is not enough money in the accessible savings pot, we urge retirement fund members to obtain their most recent benefit statements and to work out where they will be by September,” she adds.
Savings build-up required
Since at least R20 000 is required in a retirement fund to enable the minimum withdrawal of R2 000, retirement fund members who fall into this 20% category must first build up enough savings before they can access their money.
Huggett-Henchie estimates that it will take the average employee in the 20% category around four to six months from 1 September 2024 to build up a savings pot of R2 000. This means they could only access their savings pot for the first time early in 2025.
Assa said fund members need to pay close attention to the regular benefit statements they receive from their employers or product providers to make sure they understand how much they have already saved for retirement.
“The amount in the savings pot can be withdrawn at any time as long as the withdrawal is R2 000 or more. If the balance in the savings pot is less than R2 000, no withdrawal is allowed until that savings pot grows to R2 000,” Huggett-Henchie explains.
“This means that your total fund credit must be at least R20 000 on 31 August 2024 to have the minimum amount available immediately. Rather than wait for 1 September and then suffer the disappointment of not having the minimum withdrawal amount of R2 000 in your savings pot, check your retirement benefit statement sooner rather than later,” she reiterates.
Retirement fund members are supposed to receive regular benefit statements from their employers or product providers, but most don’t pay these any attention until they need the money, change jobs, or retire.
Deductions
It is critically important that retirement fund members are reminded that their savings pot withdrawals are taxed by the South African Revenue Service either at their current marginal tax rate or at a higher rate if the withdrawal pushes the applicant into a higher tax bracket.
In addition, there will most likely be an administrative fee payable. “You will, therefore, never receive the full amount you applied for,” Huggett-Henchie points out.
Retirement fund members must carefully weigh the pros and cons of accessing their savings pot, bearing in mind that it is intended only to provide relief in extreme financial distress.
“Accessing your savings pot and using the money for anything other than a serious financial emergency is reckless and costly and comes with serious financial consequences many years later when you need the money for your retirement,” she adds.
In summary
To recap, retirement fund members should note the following:
- Check your retirement benefit statement to make sure you have R20 000 or more in benefits before you apply for a withdrawal from your savings pot once the two-pot system kicks in after 1 September 2024. If you have at least R20 000, you will be able to withdraw R2 000.
- The withdrawal is taxable, and an administration fee will likely be deducted. Therefore, you will not receive the full withdrawal from your savings pot.
- You will not be able to make a withdrawal from your savings pot unless you have a tax number.
- Every time you access your savings pot, you not only pay tax on the amount but also reduce the cash lump sum of up to R550 000 that you are allowed to access tax-free on retirement.
- The savings pot, which you will be allowed to access once every tax year after 1 September 2024, is meant to provide relief in cases of extreme financial need. Accessing under any other circumstances is a costly exercise that will also impact the size of your retirement nest egg.