By Tokiso TKay Nthebe
Statistics indicate that only 6% of South Africans can retire financially secure, which is alarming. Personally, I believe like South Africans, 94% of Basotho cannot afford to retire comfortably. Retiring with sufficient savings is important and sadly, individuals often leave this responsibility with the government, employer or family members which negatively impacts their retirement outcomes.
To help employees improve their retirement outcomes and ensure that they have enough money to take care of their living expenses and maintain a good quality of life when they reach their golden years, I invited Paballo Mphana-Sello, a financial advisor to My Money Adventures Podcast to discuss retirement planning, especially in the era of the two-pot retirement system.
Excerpts from the podcast:
TKay: Why is retirement education and planning important?
Mphana-Sello: Much like financial literacy initiatives, retirement education is an important pillar to ensuring that members retire with enough savings. As such, it is key that people are provided with education and simple tools that are easily accessible to help them plan and save for retirement.
From a retirement planning perspective, the earlier you start saving, the better the outcomes. Take a 25-year-old professional joining the workforce, who earns an income and has an investment horizon of about 30 years until reaching the retirement age of 65 years. By consistently contributing and preserving retirement savings, he or she can retire comfortably. Sadly, many people don’t think about the future, to say what will happen at 65 when they retire one day. There is a need to be able to pay for living and medical expenses, groceries and other necessities in retirement, however, our generation lives for the now and do not think about what is going to happen to them in the future. There is a need to be more responsible when it comes to retirement, especially as a young individual that is starting out in the industry.
TKay: What are the common mistakes people make, when it comes to retirement planning?
Mphana-Sello: The first mistake people make is not saving for retirement. To date, there are people who have saved nothing for retirement. The second mistake that people make, especially employed people who are contributing to a pension or provident fund is cashing out their retirement fund money when changing jobs. They use their retirement benefits to go on holidays or to upgrade their lifestyles. According to a 2020 study by the Association for Savings and Investment South Africa (ASISA), two thirds of people leaving their jobs cash out everything they had saved for retirement.
The third mistake is not investing in suitable investment vehicles for retirement, especially individuals saving in their personal capacity. You would find someone keeping money in a savings account, thinking that it is sufficient instead of a high equity portfolio that is aggressive and can earn higher investment returns.
TKay: Take us through the retirement landscape in South Africa
Mphana-Sello: As you earlier mentioned, only 6% of people can retire comfortably and the majority, 94% of people are not able to retire comfortably. This majority would then turn to the State for old age grants which is a huge burden and cost for the government.
To address this problem, the government has for many years been working to reform and change the industry to ensure that people are saving and preserving their retirement benefits so that they can afford to at least retire with have something. An important change came into play on the 1st of March 2021, what was called T-Day where the pension and provident fund laws were harmonised.
Previously, if you were a member of a pension fund, at retirement you would get one third of your savings as a lump-sum and two thirds would be used to purchase an annuity. With a provident fund, you could cash out 100% of your money at retirement and then decide to do with your money. This resulted in provident fund members exhausting that capital within a year or two and then going back to the government for financial support. On T-Day, members of provident funds were forced to cash out one-third and buy an annuity with the balance.
TKay: The South African National Treasury has introduced a big elephant and topical issue, what is the two-pot retirement system?
Mphana-Sello: Let’s start with why the two-pot retirement system was proposed. Firstly, it was done to address the lack of preservation where members would cash out when changing jobs. Secondly, it was also done to give people access to their money without resigning. The reality is that people would resign to gain access to their retirement fund monies due to emergencies or whatever the case might have been at the time. So, the two-pot retirement system is there to force members to preserve.
From the 1st of September 2024, 70% (two-thirds) of members’ contributions will go into a retirement pot. With the retirement pot, members need to preserve their savings until they get to retirement. Members cannot access that retirement pot until they get to retirement.
The second pot is the savings pot, where 30% of your contributions from the 1st of September will go into the savings pot. Members will be allowed to access their savings to address whatever emergencies that may arise, subject to terms and conditions.
Though, it is called the two-pot retirement system, there are three pots with the last one called the Vested Pot. All the contributions that you have made to your pension or provident fund up until the 31st of August 2024, before this new legislation will go into the vested post and the old rules will apply to it.
TKay: What are the terms and conditions?
Mphana-Sello: Below are the terms and conditions that will apply to the savings pot and when making withdrawals.
- Savings pot: On the 1st of September 2024, a once-off seeding capital calculation will be done to fund the savings pot. The seeding capital will be 10% of whatever have saved up in your vested pot, however, to a maximum of R30 000. This amount will be readily available for withdraw, subject to tax. If you keep on withdrawing from your savings pot, you are therefore reducing the lump sum that you would otherwise get at retirement which now also affects the retirement outcomes.
See the example below:
Table 1: Savings pot seeding capital calculation
| Retirement savings on 31 August 2024 | R400 000 |
| Seeding capital – funding Savings pot10% of Vested pot or R30 000 maximum | 10% of R400 000 = R40 000Or minimum of R30 000 |
| Opening balance of Savings pot on 1st September 2024 | R30 000 (subject to marginal tax rates) |
Below are the Ts and Cs that people don’t want to hear about or are necessarily aware regarding withdrawals.
- Number of withdrawals allowed: You are only allowed one withdrawal within a tax year which starts from the 1st of March to the 28th of February the following year.
- Minimum withdrawal amount: You need to ensure that you have a minimum of at least R2 000 in your savings pot for you to withdraw. This is done to circumvent people that would want to withdraw R500 because you can imagine the administrative burden that is going to cause if you want to withdraw that little.
- Tax implications: Your withdrawal is not tax free and will be taxed at your marginal tax rate. It is also important to note is that should a member have any outstanding tax liabilities, it is possible that your withdrawal might be paid to settle the liability with South African Revenue Services (SARS).
- Administration costs: Different administrators will apply an administration fee towards your withdrawal.
TKay: What advice would you give people?
Mphana-Sello: Firstly, the most important message is that there is no need for panic because your vested pot, which are your contributions up until the 31st of August 2024, is still protected according to the current retirement fund rules. The concern from members is that if they decide to resign one day, does that mean that they are coming out with nothing until they get to retirement age 55?
The answer is no because your vested pot is still protected should you decided to resign. If you do decide to resign and you want to gain access to your vested pot, you can still gain access it but the advice to not cash out from the vested pot and rather preserve when changing jobs.
Secondly, with the two-pot retirement system you can gain access to your savings pot. It is not compulsory for you as a member to gain access into that pot, leave that money invested. If you are a member that is constantly withdrawing from the savings pot, it means that one day when you get to retirement, you might not have any cash that is available for you to get into your pocket.
The advice would be for people not to cash out. If one day there is an actual emergency or something that is important, then you can withdraw from the savings pot.
In closing, members need to remember that it is never too late to make a difference and change their financial outcomes. There are always things members can do that like making extra voluntary additional contributions. You would be surprised how R100 can make a difference in your retirement outcomes one day when you get to retirement. So, start and keep making those extra contributions to improve your retirement outcomes.
