The “two pot” retirement fund system could boost household disposable incomes by as little as R31bn or as much as R79bn in the fourth quarter of the year, estimates the Reserve Bank.
Retirement sector players have been working overtime to prepare for the new system and to estimate how much their members will choose to withdraw from the “savings” portion of their funds once it kicks in on September 1. But in a new working paper, the Bank’s researchers project that the maximum members might pull out of their funds in a high-withdrawal scenario is R100bn.
President Cyril Ramaphosa signed into law the Revenue Laws Amendment Bill of 2023 into law in June, establishing a “two-pot” system that gives retirement fund members access to retirement savings without having to resign or cash out entire pension funds.
The new system divides members’ pension and provident funds into a retirement or preservation pot, which makes up two-thirds and must stay in the fund until retirement, and a savings pot that can be withdrawn. It is expected to lead to a flood of withdrawals as members pull out up to a third of their funds, providing a boost to household spending and economic growth, as well as personal income tax collections.
The Bank projects that in the high withdrawal scenario the launch of the “two pot” system will add 0.8 percentage points to household consumption spending in 2024 and 1.8 percentage points in 2025 (as most large 2024 fourth quarter withdrawals spill over into the next year) and to remain at an almost unchanged growth rate in 2026.
“This R100bn is the upper estimate of the currently available funds within the pension fund system that will be taken by members from their vested pot and is derived from Sars income tax numbers as well as their tax deduction figures. According to Sars, on average, 85% of tax deductions are for retirement contributions,” the Bank said.
“After accounting for taxes, household disposable income is therefore only expected to be boosted by R79bn in [the fourth quarter of] 2024, by R31.5bn in 2025 and by R33.1bn in 2026.”
The researchers said that with the present system withdrawals from pension funds were about R360bn a year, and R80bn-R100bn were due to resignations. They expect these annual outflows to continue for the next decade, albeit at a slower pace in each successive year, until the transitioning to the new two-pot system is completed.
The Bank said there was a likelihood of households spending a portion of these withdrawals to reduce debt. “If this portion is about 50%, the effect would be to reduce the impact on consumption by half, so that in this scenario 2024 consumption expenditure by households would increase by 0.4 percentage points and 2025 0.9 percentage points. GDP would then increase by 0.2 percentage points in 2024 and by 0.4 percentage points in 2025.”
The moderate withdrawal scenario assumes withdrawals of R40bn this year. In this scenario, the Bank expects tax-adjusted household disposable income to be boosted by R31.5bn in the fourth quarter, R15.8bn in 2025 and by R16.6bn in 2026.
“Under a high withdrawal scenario consumption increases substantially in 2024 and 2025 before reverting to the baseline (pre-two-pot pension impact). However, a more likely scenario is for moderate pension withdrawals where households spending will add between 0.3 and 0.7 percentage points to real consumption in 2024 and 2025 respectively,” said the Bank.
“Government tax revenue will benefit from these withdrawals, with tax revenues rising by 0.3% of GDP in 2025 and by 0.2 in 2026.”
Small claims
Alexforbes expects a retirement sector outflow of about R50bn when a two-pot system is implemented in September. It said Sars had to ensure its systems were ready to handle the tax component of the payouts.
“Overall, Alexforbes is supportive of the changes, given that over the long term the outcomes of retirement members will be much improved. In the short term, however, there will be pressure on administrators to process significant amounts of small claims, given that a portion of accumulated savings up to September 1 2024 may be immediately accessible,” the financial services group said in its annual report published last week.
“We are actively developing investment strategies to meet the diverse needs of our members across different pots. We anticipate that the implementation of the two-pot system will have a positive net impact on group revenue over the long term owing to compulsory preservation of the retirement pot, increasing the pool of assets within our base.”
Sars said it would be ready to implement the two-pot system on September 1. “We are working with other role players to streamline everything.”
From September 1, all amounts saved in a retirement fund will be split into a savings component and a retirement component, with a third automatically going into the savings component. The initial amount in the savings component will be 10% of the amount saved in the vested component, up to a maximum of R30,000, while the minimum withdrawal amount is R2,000.
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