Fact or fiction? Busting myths about the new two-pot retirement system

It’s a sad reality, but only 6% of the country’s population is on track to retire comfortably, according to the 2023 10X Investments Retirement Reality Report.

One of the main reasons is many people cash out their pensions when they change jobs, often because they don’t have a “rainy-day fund” for emergencies. This is something that’ll no longer be allowed when the National Treasury’s two-pot retirement system launches on September 1.

By dividing people’s future pension fund contributions into two pots — a savings pot and a retirement one — this new system is intended to help them preserve and grow their retirement savings, while also giving them access to a portion of those savings for emergency purposes.

There are a lot of misconceptions about how this new approach to retirement planning is going to work.

To empower you to navigate the transition with ease, and dispel any potential panic, Old Mutual debunks five common myths about the two-pot pension system:

Myth 1: The two-pot system applies to everyone saving for retirement in SA

This statement isn’t entirely accurate. The two-pot system applies to most retirement funds, but there are some exceptions:

• Provident fund members over 55: If you’re a member of a provident fund, were over the age of 55 on March 1 2021, and are still a member of that same fund, you’ll have the option to choose to remain under the old system or opt into the new two-pot system from September 1.
  
  
• Pensioners, unclaimed benefits, closed funds and funds in liquidation: These categories are exempt from the two-pot system. Pensioners already receive their retirement benefits, closed funds are no longer accepting new members, and funds in liquidation are undergoing a winding-down process.
  
  
• Legacy retirement annuity funds: Certain types of older retirement fund annuity constructs have the ability to apply for exemption from the two-pot system.

It’s really important to keep reading the communications sent out by your financial services provider to see if any of these categories apply to you.

Myth 2: All my retirement savings will be up for grabs once the new two-pot system kicks in

Think again! The new system is designed to keep your retirement nest egg safe.

From September 1, the majority of your existing pension fund savings will be allocated to a “vested pot” and the new rules will not apply to these savings. That said, as a one-off deal, 10% of these existing funds (capped at R30,000) will be transferred to your new savings pot as an opening balance.

Going forward, one-third of your future contributions will fill your saving pot, ensuring you have some breathing room should you need to access some of this money for emergencies. The remaining two-thirds will go into your retirement pot, where the funds will grow untouched for use in your golden years.

It’s important to note only one withdrawal (minimum R2,000) is allowed from your savings pot per tax year before retirement.

Myth 3: I won’t pay tax on withdrawals from my savings pot

Wrong. Under the two-pot system, withdrawals from your savings pot before retirement will be taxed at marginal rates, like other forms of income.

A marginal tax rate is the amount of tax you pay on an additional unit of income. For example, if you earn more money and enter a higher income bracket, the new income will be taxed at a higher rate. Think of it as climbing a set of stairs: as you earn more, you move up to the next step, and the money you earn on that step is taxed at a higher percentage. However, the income you earned on the lower steps remains taxed at lower rates.

It’s important to understand how withdrawals have a tax impact, on both the withdrawn amount and the remaining funds. To make an informed decision, it’s best to seek advice from an accredited financial adviser before tapping into your retirement savings.

Myth 4: Only employee contributions go into the savings pot

The two-pot retirement reforms will apply to all contributions to your fund, after payment of costs, so it will apply to both employee and employer contributions.

Myth 5: The two-pot retirement system completely restricts access to your retirement savings.

This is a common misconception. The two-pot system actually addresses two key issues:

• Early withdrawals: Cashing out your pension savings when you change jobs can significantly hurt your retirement security in the long run. The two-pot system discourages this by limiting access to most retirement funds when you change jobs, promoting long-term savings habits.
  
  
• Lack of emergency funds: The National Treasury, in partnership with all key stakeholders. designed the two-pot system to allow early access to a portion of your retirement savings (those in your savings pot) for emergencies. This provides financial security in unexpected situations, while still encouraging you to preserve the majority of your savings (those in your retirement pot) for a comfortable retirement.

Navigating the complexities of the two-pot retirement system may seem daunting, but fear not, says John Manyike, head of financial education at Old Mutual. “Our financial education facilitators across all provinces offer free workshops to employers and trade unions to provide you with a comprehensive knowledge to seamlessly guide you through this transition. You can also speak to your financial adviser for more clarity. Together, let’s embrace the future of retirement planning with clarity and confidence.” 

To get in touch with a financial adviser, visit the Old Mutual website or call 086-060-6060.

This article was sponsored by Old Mutual.
_{Old Mutual Life Assurance Company (SA) Ltd is a licensed FSP and life insurer.}