Public servants who withdraw early from their retirement savings after the two-pot system starts in March next year need to be aware of the perils thereof, former acting director-general at the National Treasury Ismail Momoniat has warned.
“I’m hoping none of you withdraw funds when the government allows you to withdraw funds because if you do, you’re going to end up very poor later and rely on someone in your family to help you. When you withdraw funds, you are suddenly surrounded by vultures and you’ve got to watch out for that,” he said.
Addressing members of the Federation of Unions of South Africa (Fedusa) at its political school this week, Momoniat said the two-pot system was for relief if a public servant had a genuine emergency.
He said those wishing to withdraw from retirement funds should consult a financial adviser before doing so to ensure they make the right decision.
Allowing limited withdrawals from retirement savings was provided for in the knowledge that households face increasing pressure from rising costs and emergencies.
“I know it’s tough, even for people who earn high incomes. If I wasn’t forced to save through the collective bargaining agreement and the GEPF [government employee pension fund], I would not have saved. There are a million better things to do. As humans, we think about today and tomorrow. Even five years down the line is hard,” Momoniat said.
The two-pot system will include a savings component that can be accessed before retirement, without leaving employment. It allows one minimum R2,000 a year taxable withdrawal. The lump sum withdrawal of the savings component at retirement will be subject to lump-sum benefit rates.
Momoniat said South Africans generally do not save enough and retirement funds hardly yield 30% of what members earned before retiring.
“We use behavioural theory to plan these things. We changed the default to say if you resign, the money must go to a preservation fund. Now the sweat factor has changed to [involve financial advisers]. Increasing the sweat factor makes members think hard about whether they can really afford to withdraw the money,” he said.
Old Mutual Corporate executive Nceba Pupuma said the two-pot system needs to be managed properly or members will borrow from their future, possibly leaving them with less money than they need.
The people who transact -- the workers who withdraw for an emergency and not the ones who don’t withdraw -- will be the ones who pay.
— Nceba Pupuma, executive, Old Mutual Corporate
“The people who transact — the workers who withdraw for an emergency and not the ones who don’t withdraw — will be the ones who pay, and the cost will be extracted by that worker who withdraws.”
Ceding the transfer of 10% from your vested pot into a savings pot capped at R25,000 will allow people in 2024 to access this money in the event of an emergency, Pupuma added.
Provident fund members who were 55 years old or older in March must opt in to the two-pot system as it is a one-off choice, he said.
Webber Wentzel partner Joon Chong said while the system is welcome, it will be complex to understand. She urged taxpayers to seek financial advice before making decisions.
“A provident fund member who was 55 or older on March 1 2021 will be allowed to, from March 1 2024, keep contributing to their vested component only or contribute to the savings or retirement components only.”
Chong added that the system will have implications for emigrants wishing to access retirement funds, pre-retirement withdrawals which are subject to tax using lump-sum withdrawal benefit rates and those who resign.
The National Treasury’s explanatory memorandum, released earlier this year, said: “The ability to withdraw from the savings component will be applicable on a per-fund or per-contract basis. Withdrawals from the savings component will be added to the individual’s taxable income and will be taxed at their marginal rate.”
The memorandum said if a member dies, their beneficiary can receive the benefit in the savings component as a lump sum or transfer it to their retirement component and receive an annuity.
Addressing the Fedusa seminar on the financial management of the state, Business Unity SA CEO Cas Coovadia said government leaders need to be bold to make the right decisions for South Africa's economy and its people.
“Our minister of finance understands the issues. When I talk to him, he understands what needs to be done, but when he is with his colleagues, it’s a different story.
“Consultation is important, but don’t try to spin wheels. We interact with them all the time about the fuel levy and not funding things like the RAF (Road Accident Fund). But these are decisions that need to be taken by the government, not the minister,” Coovadia said.
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