It’s no secret that South Africans are, in general, bad savers. We don’t save enough for retirement and we don’t save for emergencies. And the pandemic only exacerbated the situation. So, in an attempt to remedy this very bleak, very real problem, Treasury has proposed a two-pot system for retirement products.
What’s the deal?
Basically, the proposed system will divide your retirement contributions into two ‘pots’. One third of your monthly contributions will be allocated to an accessible pot. The other two thirds will be allocated to a non-accessible pot. As the name implies, the ‘non-accessable pot’ cannot be accessed until you retire – even if you resign, are retrenched or change jobs.
Why is this needed?
According to SARS data from the last 3 years, over 700,000 individuals cashed out a lump sum before retirement. The data also shows that these pre-retirement withdrawals add up to R78 billion each year.
Hence the proposed two-pot system. It aims to improve the preservation of pension and provident funds while allowing you access to a portion of the funds without having to resign from your employment. Remember, you can access pension and provident funds before you reach retirement age. We wrote a blog about the different retirement fund types here.
What about RA’s?
Unlike pension and provident funds, members of retirement annuity funds cannot access their savings until they turn 55. Considering this, the two-pot system doesn’t fix the problem of individuals quitting their jobs to gain access to their retirement savings. But it will allow members to gain access to 1/3 of their funds in an emergency. For this reason, Treasury is proposing that RAs are also subject to the two-pot system.
How will it work?
There will be rules as to how and when the money can be accessed. However, as the two-pot system is still in the proposal stage, these rules aren’t yet clear. But it’s possible that attending retirement benefit / financial awareness counselling may be a pre-requisite to withdraw funds from the ‘access pot’.
The new system will only be implemented when (and if) the legislation comes into effect, and contributions will only be divvied up from the day of implementation.
More updates to Reg28
In the first week of July 2022, additional amendments to Reg28 were gazetted.
Crypto is still not allowed, but the limits to investment in hedge funds and private equity have been split. Previously, hedge funds and private equity were both limited to a maximum exposure of 10%. Statements on the latest updates from Treasury report that exposure to private equity assets can now be increased to 15%.
The big talking point
Infrastructure is now also recognised as a separate asset class, and the maximum investment limit has been increased to 45%.
Treasury’s statement points out that the aim of the amendment is to explicitly enable longer term investment in infrastructure by retirement funds. Jason Lightfoot, portfolio manager at Futuregrowth Asset Management, has pointed out that with a funding shortfall of around R1.8 trillion for infrastructure, pension funds can play a meaningful role in infrastructural development.
Feedback from the frontline
There were a number of comments about the definition of “infrastructure” in the first draft of the amendments published in February 2021. This has been revised – infrastructure is now defined as “any asset class that entails physical assets constructed for the provision of social and economic utilities or benefit for the public”.
Although the intention is for infrastructure to include roads, dams, power stations and the like, Lightfoot points out that the definition is still too broad. His concern is that listed instruments (for example MTN, Vodacom and Netcare) could also be considered infrastructure. In his view, “this is especially problematic given that National Treasury has placed an overall 45% cap on infrastructure investments.”
Saving for retirement is the biggest investment most of us will ever make. Sadly, it can also be very complicated. In this monthly blog, Carina Jooste responds to common retirement questions, ranging from which products are best suited to different circumstances to efficient tax treatments.