Old Mutual has joined Alexforbes in expressing its concern over the misconceptions and misinformation circulating about the two-pot retirement system. Incorrect information or not understanding how the system will work could result in fund members making decisions that will be detrimental to their long-term financial well-being.
During a media briefing on 10 July, representatives of Alexforbes highlighted the areas of misunderstanding and miscommunication about the system that the financial services group frequently encounters.
Read: Dispelling misconceptions about the two-pot retirement system
Last week, FANews hosted a highly informative webinar for financial advisers on the two-pot system. One of the speakers was Michelle Acton, the chief customer officer: Corporate Employee Benefit Solutions at Old Mutual. Much of Acton’s presentation unpacked what Old Mutual has learned about people’s knowledge and understanding of the two-pot system, based on its interactions with customers and financial advisers.
Acton said the two-pot system is incredibly complex once one starts to unpack the nitty-gritty details, and very few people properly understand the intricacies of how it will work. At the same time, the number of misconceptions about the essential aspects of the system is a concern, as is what some members are expecting come 1 September.
The retirement industry and financial advisers must make a concerted effort to educate members about the basics of the two-pot system. With that mind, this is what Old Mutual has found:
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Many people don’t know how the ‘pre-two pots world’ works
Acton said one of the approaches to explaining how the two-pot system will work is to contrast it with how the existing retirement-funding system works. The problem with this is that there is a widespread lack of understanding among members of how retirement funds work currently.
It has almost been assumed that because people are saving in retirement annuity, pension, and provident funds, they know how these funds work, but this “absolutely not” the case, she said.
Comment: When communicating with members or clients about the two-pot system, it may be necessary to explain how the current system works first instead of jumping directly into explaining how it will change. ASISA’s Smart About Money website has articles that explain, in a way most members can understand, the essential features of the retirement-funding system.
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Members expect to receive more money than they will
Some fund members are labouring under the false impression that the two-pot system will enable them to access (without having to resign from their occupational fund) all their retirement savings or one-third of their savings.
When the two-pot system is implemented, the only money in the savings component (the starting balance) will be the seed capital transferred from the vested component. This will be 10% of a member’s accumulated savings valued on 31 August 2024, with a maximum transfer of R30 000.
The “one-third” refers to the share of a member’s contributions that will be allocated to the savings component from 1 September, while two-thirds will be allocated to the retirement component.
Comment: Members will be permitted to withdraw everything in their savings component once per tax year, subject to a minimum withdrawal of R2 000. But how much a member has available to withdraw each year will depend on the rand amount of his or her accumulated contributions, plus the investment growth on those contributions.
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And members expect to receive their money immediately
There is not only a misconception about how much members will be able to withdraw but also when they will be able to do so. There is an expectation that because the two-pot legislation takes effect on 1 September, members will receive their money on 1 September. This is not correct, Acton said.
Members need to understand that some fund administrators may not be ready to process withdrawals by 1 September, although they can receive claims. (Furthermore, 1 September is a Sunday.)
For example, Acton said, the legislation says the calculation to seed the savings component can be done on or after 1 September. There is no cap on by when they must have done this, as long as it is backdated to 1 September. Therefore, an administrator will not be non-compliant with the legislation if it is only ready to seed the savings component in, say, two months’ time.
Old Mutual has explained in a previous communication why payouts from the savings component may be delayed. Read: Members can expect payment delays when making withdrawals from the savings pot
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Members don’t understand how withdrawals are taxed
Pre-retirement withdrawals from the savings component will be taxed at a member’s marginal tax rate (personal income tax table applies).
Old Mutual created an online calculator that enables customers to find out how much they have in their retirement fund, how much will be in their savings component on 1 September, and how much tax they will pay on a withdrawal.
Acton said more than 50 000 people, across all income levels, have used the calculator, and the overwhelming feedback is, why is Old Mutual deducting tax? The perception is that Old Mutual is deducting the tax, not the South African Revenue Service.
Old Mutual has also found that many people do not know their marginal tax rate, or what a marginal tax rate is.
Comment: Members who want to find out how the income tax brackets work and what a marginal tax rate is may find this article useful.
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The concept of vested rights is not understood
People believe they must resign before 1 September if they want to be able to access all their retirement savings.
This misconception arises because of the lack of understanding about the concept of vested rights and the purpose of the vested component. Acton said members need to understand the distinction between “old money, old rules” – the vested component – and “new money, new rules” – the savings and the retirement components.
Comment: The purpose of the vested component is to protect members’ rights that were in place before 1 September 2024. Members will continue to have the same rights to access their retirement benefits on resignation, retrenchment, or dismissal after 1 September as they do now. In these instances, they can still withdraw the savings in their vested component as a cash lump sum.
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Some believe the date will change
There are still people who think the implementation date of 1 September might change. Acton said the reality is that the implementation date is set in the legislation, and it will not be moved.
Comment: As Acton pointed out, the implementation date of 1 September is built into the enabling legislation for the two-pot system, the Revenue Laws Amendment Act, 2024, which was signed into law on 1 June. Second, any suggestion at this stage to move the date will be met with a severe backlash from fund members who are desperate to make a withdrawal. National Treasury, to accommodate the industry, shifted the implementation date from 1 March to 1 September. This decision was reluctantly agreed to by the Congress of South African Trade Unions, which said it would not accept any further delays.
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People think they must opt in, or they can opt out
Old Mutual receives enquiries from customers who believe they need to opt in into the two-pot system. The two-pot system will automatically apply to members of pension, provident, preservation, and retirement annuity (RA) funds. Essentially, every member who has not yet retired from a fund.
The only members who are automatically excluded from the two-pot system are members of provident or provident preservation funds who were 55 years or older on 1 March 2021 and have remained a member of the same fund.
These members can choose to opt into the two-pot system. They can only elect to join the system after 1 September 2024, and they have until 1 September 2025 to decide.
Currently, these members can access their entire benefit as a cash lump sum at retirement. Acton said provident fund members who can choose whether to opt in should carefully consider the implications of joining the two-pot system. Once they opt in, the decision cannot be reversed.
If they choose to opt in, the calculation for the seeding of their savings component will be based on their accumulated value in the month in which they join the two-pot system.
The two-pots legislation also provides for the exemption of “legacy” or “old-generation” RA funds.
Action said Old Mutual also receives enquiries from customers who say they don’t want to have anything to do with the two-pot system. She said in that case, members should simply leave their money alone. Their retirement savings will remain invested where they are now.
Comment: Members are not obliged to make any pre-retirement withdrawals from their savings components. They can leave all their money alone until retirement.
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Impact of savings component withdrawals on the tax-free amount
One of the most prevalent pieces of misinformation is that pre-retirement withdrawals from the savings component will be taken into account when determining the up to R550 000 that can be withdrawn tax-free at retirement.
Acton said pre-retirement withdrawals from the savings component are included in member’s taxable income, but they do not accumulate towards the R550 000 tax-free at retirement.
(Remember, pre-retirement withdrawals are taxed at a member’s marginal tax rate, whereas at retirement, any lump-sum withdrawals from the savings component are taxed according to the retirement fund lump-sum benefits table.)
Acton said the confusion may arise because in the current system any pre-retirement withdrawals do affect the R550 000 tax-free at retirement. This will continue to apply to any pre-retirement withdrawals from the vested component once the two-pot system takes effect.
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Concern that splitting the money will affect returns
There are members who believe that splitting their retirement savings into different components will result in their receiving a lower investment return.
Acton said Old Mutual does not see the two-pot system changing retirement investment strategies. The total amount in all the components is retirement money, and the savings component is a member’s lump sum at retirement. “It should be invested as such; it should be managed as such.”
However, there is a belief that if the money is split into different components, it will earn a lower return, but this is not the case.
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Most people aren’t planning a spending spree
Old Mutual has asked people who say they plan to make a pre-retirement withdrawal from their savings component what they will use the money for. The overwhelming majority say they want to use it to settle debt, Acton said.
This contradicts the common perception that people want to access the money because they want to spend it recklessly. “That’s not the message we’re getting […] Maybe we’re getting the wrong message.”
Acton said many people see the two-pot system as an opportunity to settle some of their debt, which is not surprising considering the financial strain South Africans are taking.
