Proposal for new Structure in Pension Industry

The proposed two-pot system in the South African pension industry aims to introduce a new structure for retirement savings. Under this system, individuals will have two separate pots or accounts for their pension funds. The first pot, known as the preservation pot, will hold the contributions made by the individual and their employer during their working years. This pot will be preserved and cannot be accessed until retirement.

The second pot, called the discretionary pot, will allow individuals to make additional voluntary contributions and have more flexibility in accessing the funds before retirement. This system aims to provide individuals with a balance between long-term savings and short-term financial needs.

Here are some of the key facts of the proposal:

  • Effective Date: The two-pot system is scheduled to take effect on March 1, 2024.
  • Withdrawal Limits: Under the proposed legislation, retirement fund members will only be able to withdraw up to R25,000 of their existing savings.
  • Deter Cashing Out: The two-pot system aims to deter individuals from cashing out their retirement savings when they resign and discourage workers from resigning to access their retirement funds.
  • Increase in Savings: The Actuarial Society of South Africa estimates that a two-pot system would triple retirement savings in South Africa.
  • Exclusions: Legacy retirement annuity funds entered into before January 1, 2022, with specific characteristics, are excluded from the two-pot retirement system.
  • System Readiness: The pension fund industry needs to work on system development and prepare for the administrative changes required for the two-pot system. This includes developing automated systems, member engagement platforms, call centers, and fraud prevention measures.
  • Contribution Mechanism: The contribution mechanism will be redesigned to ensure separation of payments into the two separate pots. Member education and change management processes will also be implemented to help members understand the new system and the claims process.
  • Implications for Over-55s: Updated provisions indicate that provident fund members over 55 years old will have the option to continue contributing to their current provident regime or move into the new two-pot regime. This decision will be irreversible once made.

It is important to note that the information provided is based on the proposed legislation and may be subject to change.

Ruvan J Grobler RFP™

Photo by Ian Schneider on Unsplash

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