New era in SA retirement: Two-Pot system launches September 2024

Starting September 1, 2024, South Africa’s retirement landscape will undergo a dramatic transformation with the introduction of the two-pot retirement system. This groundbreaking reform promises to revolutionize how South Africans access their retirement savings, balancing immediate financial needs with long-term security. With a mix of emergency access and preserved funds, this system aims to empower retirees while ensuring financial stability. The Actuarial Society of South Africa’s Natasha Huggett Henchie explains the intricacies and potential impacts of this pivotal change, highlighting the importance of understanding the new rules to make informed decisions about retirement savings.

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Highlights from the interview

In an insightful interview with Bronwyn Nielsen, Natasha Huggett Henchie from the Actuarial Society of South Africa discusses the transformative two-pot retirement system set to take effect on September 1, 2024. This new system introduces a significant change in how South Africans can access their retirement savings, aiming to balance short-term financial needs with long-term security.

Henchie explains that while there might be a temporary increase in withdrawals, the long-term structure only allows annual access, promoting a more sustainable management of retirement funds. Importantly, when individuals leave employment, their savings remain within the industry, potentially leading to a larger asset base over time.

Addressing the tax implications, Henchie clarifies that withdrawals will be subject to tax at marginal rates, and administrative fees will also apply. This means individuals need to be aware that the amount they withdraw will be less than expected after these deductions. To avoid financial surprises, it’s crucial for members to understand these costs.

Henchie acknowledges the challenges of effectively communicating these changes to the broader public. Efforts are being made to simplify the message and reach individuals through various means, including WhatsApp communications and benefit statements.

As the industry prepares for this transition, Henchie assures that significant investments have been made to ensure systems are ready. The Financial Conduct Authority is conducting site visits to assess readiness, and despite some legislative finalizations pending, Henchie is confident that the industry will be prepared for the September deadline.

In summary, the interview emphasizes the importance of understanding the new system, the tax and fee implications, and the industry’s readiness to implement these changes, ultimately aiming to provide a more balanced and sustainable retirement savings approach for South Africans.

Edited transcript of the interview ___STEADY_PAYWALL___

00:00:11:16 – 00:00:40:07 Bronwyn Nielson: I’m joined by Natasha Huggett Henchie from the Actuarial Society of South Africa. Natasha, thank you very much for your time. We’re drilling down into the two-part retirement system and what it means for you and me, the men and women in the street, as the deadline looms on the 1st of September 2024. So can you just take us back and unpack for the layperson what we are talking about here?

00:00:40:09 – 00:01:06:00 Natasha Huggett Henchie: Okay, so the history of this. Thank you, Bronwyn, for allowing me the opportunity. The history of this kind of time in Covid, I suppose, where people were needing money out of jobs, and the government was looking for a way to try and give them some access to money. At the same time, there’s been this history of trying to get preservation with people because at the moment, if you leave your job in South Africa, you take all your money with you.

00:01:06:05 – 00:01:31:10 Natasha Huggett Henchie: So they’re trying to say, well, can we kind of get this preservation? And they hit on the idea of this two-part system where it would be a little bit of a quid pro quo. So what they would do is set up an arrangement to allow people to access a third of the benefits on a regular basis and then lock away two-thirds into retirement benefits, which they could only then access when they get to retirement.

00:01:31:12 – 00:01:33:14 Natasha Huggett Henchie: And that’s the genesis of it really.

00:01:33:16 – 00:01:56:18 Bronwyn Nielson: Just to take a step back. You mentioned that it was implemented when Covid hit and everyone was in dire straits. Not to say that that isn’t the case now with record-high interest rates, record inflation, and a low growth scenario, but it has taken a while to implement. If the objective was to provide relief during Covid.

00:01:56:19 – 00:02:15:17 Natasha Huggett Henchie: Yes, absolutely. So that was where the thoughts came from. But I think, as you said, people are still struggling with high interest rates, high petrol prices, and high inflation. You know, the average person in the street just doesn’t have enough monthly income. Food is expensive and so on.

00:02:15:21 – 00:02:18:10 Natasha Huggett Henchie: So we are all struggling.

00:02:18:12 – 00:02:49:21 Bronwyn Nielson: Now, the mechanism of this becoming effective on the 1st of September 2024. I see the advice that you, as the Actuarial Society of South Africa, are offering to the public is to look at your retirement benefit statements, which you get regularly if you are engaged in a retirement plan, and then assess the situation and really work out for yourself what it is that you will have access to. Is that the starting point?

00:02:49:23 – 00:03:11:07 Natasha Huggett Henchie: Yes. Just to explain, on the 1st of September, what’s going to happen is on the 31st of August, what you’ve got in your fund will be seeded. Seeding means they are going to transfer some of your money into your available savings pot. The amount that’s going to be transferred is 10% of what you’ve got, but they are limiting it to a maximum of 30,000. If you’ve got 100,000, then 10,000 would go into your seeding pot, but if you’ve got more than 300,000, you will hit the cap.

00:03:11:09 – 00:03:34:22 Natasha Huggett Henchie: Whatever you’ve got will be transferred. So people can do that calculation for themselves if they’ve got their benefit statement. Even if it’s a little bit out of date, you can estimate the amount of money you will have as your seeding capital, which will be the amount you could withdraw if you are in dire straits sometime after the first.

00:03:34:22 – 00:03:50:09 Bronwyn Nielson: Cut to a maximum of 30,000, right?

00:03:50:11 – 00:03:54:13 Natasha Huggett Henchie: Yes, a maximum of 30,000 into seeding. But remember, what’s going to happen is that contributions after the 1st of September will go into that part. So if you wait six months, you’ll have your 30,000 plus a third of what you normally contribute available. If you’re paying 1,200 a month, you’ll have another 300 rand in six months, so you’d have 31,800 to withdraw.

00:03:54:19 – 00:04:16:09 Bronwyn Nielson: Now, what is going to happen to the retirement fund industry? I remember debating this with colleagues when we first heard about the two-part retirement system. Effectively, people could access that money in huge amounts. Is there a chance we could see instability in the retirement industry?

00:04:16:09 – 00:04:48:21 Natasha Huggett Henchie: Funny enough, because of the cap and to just go back a bit as well, you need to have a minimum of 2,000 in your savings pot to be able to withdraw. So there are going to be some people who, with less than 20,000, are not going to be able to withdraw. That’s the first point. The second point is because of that cap, we’ve done some numbers, and I’ve worked with a number of actuaries across the industry. You’re looking at probably about a three and a half, four and a half, maybe 5% maximum that’s going to be seeded. So it’s not the whole fund that’s going to be available.

00:04:48:23 – 00:05:07:00 Natasha Huggett Henchie: So yes, there will be a small short-term dip in people taking money, but in the long term, you can only access it once a year. It’s going to naturally spread out. The reverse side of the coin is that people are not going to be able to access that two-thirds benefit. So if you leave employment, that money will stay within the industry, meaning that actually, we’re going to build up a bigger asset base in the long run.

00:05:26:14 – 00:05:55:03 Natasha Huggett Henchie:
And so, yes, there will be a small short-term dip, as it were, in people taking money. But in the long term, you can only access it once a year. So, it’s not going to naturally spread out. And I think the reverse side of the coin, the fact that people are not going to be able to access that two-thirds benefit…

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00:05:55:03 – 00:06:08:23 Natasha Huggett Henchie:
So, if you leave employment, that money is going to stay within the industry, which means that actually we’re going to build up our projections. So, we’re going to build up a bigger asset base in the long run, which is quite interesting.

00:06:09:01 – 00:06:11:06 Bronwyn Nielson:
What is your advice on accessing that?

00:06:11:08 – 00:06:12:02 Natasha Huggett Henchie:
So, don’t…

00:06:12:02 – 00:06:13:15 Bronwyn Nielson:
Do it critically…

00:06:13:15 – 00:06:39:11 Natasha Huggett Henchie:
The Christmas holiday or, you know, it’s really there for emergency savings if you’ve got an illness or a crisis or something. It really is there to help you in an emergency. Use it to settle debt or sort yourself out. And obviously, to the extent that you use it, you’re not going to have this retirement fund. So, you know, just be aware.

00:06:39:11 – 00:06:41:22 Bronwyn Nielson:
Fundamentally, it changes the nature of the retirement system in South Africa. Where are we taking best practice from?

00:06:50:09 – 00:07:24:20 Natasha Huggett Henchie:
So, a lot of this comes from Chile, where they offered access to members. The Australians, during Covid, allowed their members to get access too. So, it is kind of industry practice. Americans have allowed people access as well. We are trying to mirror that. But, you know, as I said, the difference in South Africa is that everyone in those places has never, you know, it’s like you get your money when you retire in those countries. You don’t. And so, we’re kind of bringing both sides of it in.

00:07:24:20 – 00:07:28:07 Bronwyn Nielson:
Now, Natasha, the discussions to this point have been so academic. Has there been a concerted effort to really reach the man or woman on the ground? Because you would assume that that is where the money is most needed in the country. And it’s a complicated system to unpack, even on business channels. So, what has been done to reach the broader consumer in South Africa?

00:07:57:19 – 00:08:17:16 Natasha Huggett Henchie:
So, yeah, I mean, I suppose all the industry participants are trying to communicate, and I don’t think that’s really something the financial services industry has done particularly well, is communicate. But, you know, we are trying our best to get it through to the layperson, help them understand it in real terms. So, with benefit statements, with… I mean, my own company is looking to do a WhatsApp communication kind of, you know, you follow a little personality and you know their lifestyle and what they do with their money. So, we are trying to find ways to communicate in a way that people can understand.

00:08:40:10 – 00:09:02:03 Bronwyn Nielson:
And the administrative burden. We’ve seen a number of large administrative projects not coming to fruition or having many challenges in the early stages. How are we going to ensure smooth functioning from an administrative landscape as we kick over on the 1st of September, 2024?

00:09:02:08 – 00:09:35:10 Natasha Huggett Henchie:
Yeah, so obviously all the industry players have invested a lot of time, money, and effort into updating their systems. I know that the FCA is doing site visits at all the administrators in the coming weeks to assess their readiness. And actually, most of us are ready, but we’re just waiting for SA, so that’s the last plug in the hole that we need to get to there.

00:09:35:10 – 00:09:45:08
Natasha Huggett Henchie:
So, we kind of just need to understand exactly how that’s going to work to be able to test fully. So, yeah, we have to be ready.

00:09:45:10 – 00:10:05:16
Bronwyn Nielson:
And I think you bring us to a very, very important point. It’s an important point that we move to now because this money is not free. It is subject to tax. And I think if you can just explain that mechanism, the impacts of what you are asking for are not what you are going to get at the end of the day.

00:10:05:19 – 00:10:13:17
Bronwyn Nielson:
Once the regulatory deductions, specifically from a South African Revenue Service perspective, have been made. Can you just take us through that?

00:10:13:18 – 00:10:41:01
Natasha Huggett Henchie:
Yes. So, this is set that they’re going to tax at marginal rates. So, for example, an 18% taxpayer, someone whose salary is in the 200,000 Rand level, will pay 18% of whatever they withdraw from their savings pot. This is to avoid arbitrage. Most administrators are going to charge a fee, and the fees will differ, but there will be some kind of fee.

00:10:41:03 – 00:11:03:14
Natasha Huggett Henchie:
Our concern as the Actuarial Society is very much that, you know, you might go to the ATM thinking you’re going to withdraw 2,000 Rand, but only 1,600 Rand comes out because 200 Rand goes to an admin fee and 200 Rand goes to tax. It’s very important for members to understand this and recognize that there will be a fee and they will get less than what they thought. This is a crucial message to get out there.

00:11:03:16 – 00:11:17:23
Bronwyn Nielson:
Natasha, we’ve spoken about you waiting for SA as the last player in the mechanism to make this a reality on the 1st of September, 2024. Do you foresee any delays, given how this has come together to this point?

00:11:35:15 – 00:11:55:14
Natasha Huggett Henchie:
I think that up until a week ago, when they actually signed the amendment bill, we were not sure that it was going to go ahead. We actually thought it might be delayed and that it would be a post-election thing. But now that they have signed it, I think it’s all systems go.

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00:11:55:14 – 00:12:19:01
Natasha Huggett Henchie:
There are also two pieces of legislation that still need to be signed, but I think it’s all systems go. So, come hell or high water, we actually have to be ready. SA has to be ready. The reality is that there are 9 million pension fund members out there who are not all going to be paid on the 2nd of September.

00:12:19:03 – 00:12:45:02
Natasha Huggett Henchie:
There are a number of other steps that need to be followed as well. For example, the rules need to be registered. There will be a process to follow. Administrators will have to prioritize some claims. There will be some disinvestment from some funds. So, there will be a delayed process for the first few months as people get in the queue and get their money if they are desperate for it.

00:12:45:04 – 00:13:08:19
Bronwyn Nielson:
Thank you so much for taking us step by step through the implementation of the two-pot retirement system, which comes into effect in South Africa on the 1st of September, 2024. Thank you for the awareness that you’re creating in terms of what people need to look out for and the reality of what this means for their own retirement pot.

00:13:08:20 – 00:13:14:17
Bronwyn Nielson:
Thank you so much, Natasha Huggett Henchie, for joining us from the Actuarial Society of South Africa.

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