Times are tough for consumers. And the National Treasury is worried that rising financial pressure could see people increasingly resigning from jobs to access a portion of their precious pension or provident fund savings.
To combat this, the nation’s purse keeper has released a set of draft reforms for comment around introducing a “two-pot” system for retirement savings that will grant members of retirement funds access to one-third of their pension savings once a year, in an emergency, while preserving the other two-thirds for retirement.
If all goes according to plan, as of March 1 2023, members of retirement funds in South Africa will be able to withdraw a portion of the money they have saved in their fund should they need that money for any reason.
FNB said only about 10% of retirement fund members preserve their retirement savings when they change employers. Most choose to access and spend some or all of these vital retirement funds instead, and this has been a significant contributing factor to the troubling statistic that less than 10% of people in this country are in a position to retire comfortably.
Samukelo Zwane, the head of product development at FNB Wealth and Investments, said the proposed two-pot retirement saving system balances flexibility with preservation.
“The new two-pot system will effectively ring-fence two thirds of the money you have saved for retirement and ensure that you leave those savings intact when you change jobs or leave your fund. The money placed into your retirement pot can only be used to purchase an annuity that will pay you an income in retirement, which means that this retirement reform will put far more retirement fund members on a path to a better retirement.”
He added that the need for this type of flexibility to be built into retirement funds was highlighted during Covid-19, when the lockdowns put many people in a difficult financial situation.
“Many of those who were struggling to make ends meet actually had money saved in their retirement funds, but couldn’t access it, which led to the untenable situation in which we saw a lot of people making the poor long-term decision to resign from their jobs, just to access a short-term financial solution by withdrawing their retirement savings.”
Ronald King, the head of public policy and regulatory affairs at PSG Wealth, said while this may seem like a good way to access much-needed cash in a dire situation, if these regulations came into effect, he would advise people to think very carefully about the longer-term impact of tapping into precious retirement savings.
He said it was important to note that the one third pot that you can access will only be created in March next year and will effectively be empty. “You will therefore only have access to one third of your future savings. It is also important to note that any withdrawals from the one third pot will be taxed at your marginal (highest) tax rate and the ins and outs of how this will impact the sum that you have when you eventually retire is a worthwhile discussion to have with your financial adviser before making any decisions.
“The number of South Africans who can afford to retire comfortably is already worryingly low and any withdrawal from these savings could impact this further,” said King.
However, he concedes that an emergency is an emergency.
“This is where the value of a good financial plan comes in – working with an adviser to make sure that you have emergency funds available when you need them but with as little impact on your longer-term savings as possible.”
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