The South African government is set to shake up the retirement landscape with groundbreaking reform legislation. This ambitious proposal aims to encourage pre-retirement preservation and alleviate financial distress concerns. Let's hear more from Deresh Lawangee, CEO at RISE.
Introducing the "two-pots" retirement system, this reform will have far-reaching implications for retirement savings strategies, providing individuals with greater control and flexibility over their financial future. The legislation is still a draft so there is still time to submit comments to National Treasury for their consideration.
The Three Components:
Under the proposed system, retirement funds will be divided into three components: the Savings Component, the Retirement Component, and the Vested Component. Let's take a closer look at each:
1. Savings Component: One-third of retirement fund contributions will be allocated to this component. It allows individuals to make withdrawals before retirement without terminating their employment. It's important to note that withdrawals from this component will be added to taxable income and taxed at the marginal rate. The legislation proposes the creation of "seed capital" to ensure immediate access to retirement funds. The starting balance, consisting of 10% of the Vested Component (up to R25,000 or less), will be available for withdrawal on the implementation date.
2. Retirement Component: Two-thirds of an individual's retirement assets will be allocated to this component. It will be accessible only upon retirement and received as an annuity. The current de-minimis for annuity commutation will apply to this component. Lump sum withdrawals from the Retirement Component will be permitted for individuals who emigrate from South Africa and cease to be tax residents.
3. Vested Component: This component will retain the current retirement regime's rules, including once-off withdrawals from preservation funds and access to pension and provident funds upon resignation. It also allows for inter-fund transfers and tax-free transfers between components.
Potential Impact and Benefits:
The introduction of this new retirement reform could potentially create a liquidity event in investment markets due to the seed funding and subsequent drawdown from existing retirement savings. Retirement fund managers may need to sell long-term assets to fund the withdrawals, which might result in short-term economic impacts such as a weaker currency, capital loss, or higher bond yields.
In Chile, where similar legislation was introduced, the impact on their investment market was well documented. See my article on the Chilean Experience here.
One significant advantage of the reform is the increase in discretionary spending from the Savings Pot. This boost to the local economy can stimulate growth and support businesses, thereby benefiting the wider community.
Conclusion:
The draft retirement reform legislation in South Africa, effective from March 1, 2024, represents a notable step toward greater preservation and flexibility in retirement savings. By offering individuals the ability to make well-informed decisions about their retirement funds, this reform empowers individuals to secure a more financially stable future. With the "two-pots" system and its focus on pre-retirement preservation, individuals can take charge of their retirement planning and enjoy newfound flexibility while ensuring long-term financial stability.
If you want to encourage your employer to connect with RISE and unlock a new world of employee benefits, you may contact them through this link. The team behind RISE will walk you through the details of how partnering with them can benefit your company directly.