On December 14, 2021, the National Treasury published two documents on new pension reform proposals for public comment which detail how he plans to transform the retirement savings industry and improve savings outcomes for all South African workers.
These changes will lead to a fundamental shake-up of pensions and pensions in the country, according to analysts at South Africa’s oldest insurance company, Old Mutual. Old Mutual was established in Cape Town in 1845 as South Africa’s first mutual life insurance company.
Andrew Davison, head of advice at Old Mutual Corporate Consultants, says the most significant of the reforms is the introduction of the two-pot system in which a member’s retirement savings will in future be split into two pots:
- An Accessible Pot in which a third of their contributions will be invested;
- A retirement pot, where the other two thirds will be invested but inaccessible.
“This measure will significantly improve retirement outcomes while providing flexibility to deal with unforeseen events before retirement. More importantly, it prevents workers from cashing out their retirement savings, leaving nothing for retirement,” Davison said.
“This reform could ensure that every employee who belongs to a fund has enough money to live comfortably in retirement.”
Davison said the accessible pot will be accessible but will still face certain restrictions – and will not be the same as a transactional bank account. The proposal is that access will be limited to once or possibly twice a year and subject to a minimum of R2,000, for example, he said.
“To ensure that people make sound financial decisions, it may be necessary to seek advice on pension benefits before making any withdrawals. Unlike the current rules, the retirement pot will not be accessible when changing jobs – you will have to leave this pot invested until retirement, as the name suggests.
One of the aims of the new system is to expand pension coverage in South Africa to include temporary, contract and seasonal workers and the self-employed, including those in the gig economy.
The proposal is to introduce automatic enrollment whereby all employers must enroll all employees in a retirement fund, Davison said.
“There are various challenges that will require careful thought and planning, including infrequent and variable contributions, the lack of a clear ‘salary’ on which to base contributions, and benefits, especially for the self-employed and workers on demand, whether to allow opt-out at an individual level, affordability of contributions with the potential need for a wage subsidy and many others.
Changes, even positive changes like these, raise concerns that the benefits or features of the current system will be lost. There’s no reason to worry about that because grandfathering will be protected, Davison said.
“This means that any savings you have on the implementation date (plus the growth of those savings) will be subject to the same rules as before, including the ability to access the savings when changing use.”
Another crucial challenge will be the tax treatment of these two pots.
Currently, the tax treatment of retirement savings is based on tax-exempt contributions, with growth within the retirement vehicle being tax-exempt and then the benefits being taxed, Davison said.
“The paper discusses at some length the shortcomings of this existing tax treatment compared to the two-pot system and suggests four alternative proposals.
“In short, it is possible that the tax treatment of the two pots is different. There are also questions about retirement funding limits and how these might need to change, including how they might overlap with limits on tax-free savings accounts.
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