Members of retirement funds who are contemplating making a withdrawal when the two-pot retirement system takes effect next month should find out whether they will be entitled to access a portion of their savings, advises the Office of the Pension Funds Adjudicator (OPFA).
The two-pot system provides for a member’s contributions (plus the investment growth thereon) to be allocated to a savings component (or pot) and a retirement component.
Retirement savings accumulated before 1 September will go into a vested component, to which no futher contributions can be allocated. These accumulated savings will continue to earn investment returns after 1 September.
Funds must make a once-off transfer of 10% or R30 000, whichever is lower, from the vested component to the savings component to provide an opening balance (or seed capital).
The savings component will consist of the once-off seed capital amount and one-third of the member’s contributions (plus the investment growth thereon) from 1 September.
Members can make withdrawals from the savings component once during the tax year if the withdrawal is R2 000 or more. If the balance in the savings component is less than R2 000, no withdrawal is allowed until the balance grows to R2 000.
For the seed capital to meet the R2 000 threshold, a member’s fund credit must be at least R20 000 on 31 August 2024.
Natasha Huggett-Henchie, a consulting actuary and member of the Actuarial Society of South Africa’s Retirement Matters Committee, has estimated that at least 20% of the country’s retirement fund members will not have enough money in their savings component on 1 September to make a withdrawal.
The Retirement Matters Committee surveyed some of the country’s biggest retirement fund administrators and found that the average benefit of the 20% of fund members with retirement savings below R20 000 is projected to be about R9 000 on 1 September. Of this R9 000, 10% (or R900) will go into the savings component. Since at least R20 000 is required to enable the minimum withdrawal of R2 000, members who fall into this 20% category must first build up enough savings before they can access their money.
Huggett-Henchie estimated it will take the average employee in the 20% category about four to six months from 1 September to build up a savings pot of R2 000. This means they could access their savings component for the first time early in 2025.
Apart from not meeting the R2 000 threshold, a fund can restrict a member’s ability to withdraw from their savings component where the member owes amounts to third parties that are secured or payable by the fund. These may include housing loans, judgments in favour of an employer, and maintenance or divorce orders. Please refer to pages 3 and 4 of Moonstone’s two-pots brochure for more information.
Seeding calculations may take time
Retirement funds must amend their rules and adjust their administrative systems to allow members to access their savings component from 1 September.
Members should note that although the two-pot system takes effect on 1 September, some fund administrators may not be ready to process withdrawals by 1 September, which falls on a Sunday this year.
According to Old Mutual, the legislation states the calculation to seed the savings component can be done on or after 1 September. There is no limit on by when administrators 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 two months after 1 September, for example.
The Association for Savings and Investment South Africa (ASISA) has said the seeding calculations and the transfers from the vested to the savings component may take some time because fund administrators will have to perform the calculation for millions of fund members.
“Only once the administration systems have been updated and the seeding calculation done will members have a balance in their savings pot to withdraw,” said Adri Messerschmidt, senior policy adviser at ASISA.
Application process
Members must submit an application to their retirement funds before they can make a withdrawal from their savings component.
“This will not be an automatic process, and retirement fund members will not receive an automatic deposit into their bank accounts. The fact that the money is available for withdrawal in the savings pot does not mean it will automatically be paid out,” Messerschmidt said.
Once the retirement fund or the fund administrator receives the application, a member verification process will be activated to prevent fraud. If the personal details on the application do not match the details on the fund’s records, the application will be rejected. To prevent unnecessary delays, fund members should verify their details with their retirement funds before 1 September.
If the member has been successfully verified, has provided the information requested on the application form and a tax number, and has at least R2 000 available in the savings component for withdrawal, the fund administrator will apply for a tax directive from the South African Revenue Service (SARS).
SARS will provide a tax directive indicating how much tax, if any, is payable and whether any outstanding taxes, penalties, and interest are payable to SARS. Money owed to SARS, together with tax payable on the withdrawal, will be deducted from the requested withdrawal amount first.
The fund administrator could also deduct an administration fee.
The administrator will make these deductions and pay the balance into the member’s bank account. The payment will only be made into verified bank accounts to prevent fraud.
Messerschmidt said this process can take several working days, provided there are no snags, such as unverified details or incomplete applications. In addition, fund administrators are expecting large volumes of applications, which is likely to result in delays.
Communication can avoid complaints
In a statement issued last week, the Pension Funds Adjudicator said retirement funds have a fiduciary duty to act in the best interest of their members and provide them with relevant and adequate information.
In this regard, funds should share information about what is payable in terms of the fund rules, turnaround times for processing withdrawals, and any challenges that a fund may be experiencing in implementing the two-pot system. It said this will minimise unnecessary complaints to the Adjudicator’s Office – complaints that could have been resolved faster and earlier if there had been clear communication.
The Adjudicator said it is not only funds that should be communicating with their members; members have a duty to seek information from their funds about their benefits entitlement under the two-pot system.
Huggett-Henchie said fund members regularly receive benefit statements from their employers or product providers, but most members do not pay these any attention until they need the money, change jobs, or retire.
“Understanding how much you have already saved towards your retirement is the first step in understanding how much, if anything, you are permitted to withdraw on 1 September 2024.
“Rather than wait for 1 September 2024 and then suffer the disappointment of not having the minimum withdrawal amount of R2 000 in your savings pot, check your retirement benefit statement sooner rather than later,” she said.
The OPFA said it expects funds to resolve complaints relating to withdrawal claims “at an early stage if members do not qualify to access the once-off seed capital amount in the savings component in terms of the fund rules”.
OPFA cannot address complaints on rule amendments
The Adjudicator’s Office said it cannot adjudicate complaints where a fund has not amended its rules to bring them into line with the two-pot system.
“The role of the OPFA in any complaint relating to the two-pot system is to apply the fund rules and ensure that funds comply with their administrative process in this regard. If the rules of a fund do not afford a fund the legal power or capacity to do something, then such purported act by the fund is ultra vires and accordingly null and void. Therefore, if a fund fails to amend its rules to provide for the two-pot retirement system, then the OPFA cannot grant relief in this regard.”
The Office said the courts have held that rule amendments or the validity of rule amendments are beyond the Adjudicator’s jurisdiction. In this regard, it cited paragraphs 23 to 28 of the Supreme Court of Appeal’s decision in Joint Municipal Pension Fund and Another v Grobler and Others.
Members who are aggrieved by their fund’s failure to register rule amendments required by law may approach the FSCA, which has the power to issue a directive to the relevant fund to amend its rules.
According to the FSCA, 96.3% of retirement funds submitted, by the deadline of 31 July, amendments to their rules to align them with the two-pot legislation.
