Good or bad? New retirement rules a poser

Proposals for amendments to retirement funding rules could help cash-strapped people and families, allowing them to invest in building a home or buying property.

But this could also worsen South Africa’s retirement crisis where just 6% of individuals can afford to give up work, says an economist. And the current low economic growth is the biggest obstacle to retirement funding.

Draft Revenue laws

National Treasury and the South African Revenue Service recently released the 2023 Draft Revenue Laws Amendment Bill and 2023 Draft Revenue Administration and Pension Laws Amendment Bill to provide for the first phase of the “two-pot” retirement system.

According to Treasury, the system will provide limited early access to retirement funds through a savings component.

New system

The new system will allow people to access a third of their retirement funds, while preserving the rest for retirement. Chief economist at the Efficient Group Dawie Roodt said there were pros and cons to this.

“The downside was the fact that people would have access to their savings: they would probably withdraw the third and have less at retirement, potentially making them a burden on the state. But on the other hand, there were very good arguments about why people should be allowed to take some of their savings for building or buying property.

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Retirement money

“So that certainly is positive,” Roodt said. “Another positive – and again it depends on your point of view – is that you will not be allowed to take your full retirement money the day you resign,” he said.

“Quite often what happens is that people resign because they want to get access to their pensions. “This time around, you are not allowed to get access to your two thirds, at least of your pension. If you do resign, you have to put it in a saving spot somewhere,” Roodt said.

“This could be seen as a good thing because people will not have access to that and will be forced to use that for retirement one day.

“But the bad thing is that, philosophically, people should have the right to do with their money whatever they want and there shouldn’t be a limitation on this overall,” he said.

Proposals

The legislation outlined a few proposals including that current retirement fund and retirement annuity members could only withdraw up to R25 000 of their existing savings from March 2024.

Treasury explained: “To limit the adverse effect on liquidity, it is proposed that seed capital [the withdrawal from existing retirement savings] should be calculated as 10% of the benefit accumulated in the ‘vested component’ as at 29 February 2024, limited to R25 000, whichever is the lesser.

“It is important to note that when the member of the retirement fund withdraws the seed capital, it will be subject to the normal tax rates in the hands of the member.”

It added: “Members of funds should be encouraged to only exercise the withdrawal option as a last resort and to try to preserve their savings for retirement for when they retire.”

Benefit fund

Treasury also said that defined benefit funds must allow their members to withdraw one-third of the member’s money, while the remaining two-thirds remained in the “retirement pot”.

Roodt said the outcome of this was that there would be a repeat of what was seen previously, although it was possible that, in the end, a few more people would save for retirement.

“So overall, I do not think it is going to have much of an impact.

“It is probably going to have a little bit of a positive impact in terms of how much money people will save for retirement.”

“Few people may save for retirement and that is a major problem in South Africa, but this legislation is not going to make much of a difference to that,” added Roodt.

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