July Savings Month highlights how Two Pot can improve SA retirement outcomes

South Africa’s new Two-Pot retirement system is generating a lot of excitement about accessing retirement savings. With July being national savings month in South Africa it’s worth remembering that beyond providing access to retirement savings in cases of emergency, the long-term intention of Two-Pot is to improve the country’s retirement outcomes by keeping South Africans in work and saving more, for longer.

“While Two Pot strikes a successful balance between access and preservation, there is no doubt that the main intention of the legislation is to improve South Africa’s retirement outcomes,’’ says Guy Chennells, Chief Commercial Officer at Discovery Corporate & Employee Benefits.

Beyond removing the short-term incentive for people in financial crisis to leave employment to access their retirement savings, “Two-Pot also ensures the long-term preservation of the bulk of retirement savings and rewards the preservation of accessible savings with tax advantages, to improve the ability of South Africans to manage retirement independently,” adds Chennells.

South Africa’s big hairy audacious savings goal – a secure retirement for all

Two-Pot provides employees access to money in emergencies without requiring employees to give up their jobs so that they can ‘cash in’ their retirement funds. At the same time, the new retirement system ensures that a full two-thirds of each employee’s annual retirement contributions continue to be saved and invested for when they no longer work or have a steady employment-generated income.

The fact that people can now access some of their retirement savings for emergencies might also take the grudge out of contributing to employer-sponsored retirement funds. This might even “increase contributions to employee benefit schemes as people realise that in times of need they will have access to a portion of any additional money contributed,” says Chennells.

In short, beyond providing access to retirement savings “the real genius and intent of Two-Pot is to attract more savings to South Africa’s national retirement pot and meaningfully address the country’s retirement savings deficit,” says Chennells.

Tax-incentivised savings tool

From a tax perspective, “Two Pot is designed to keep people investing more for longer, providing sufficient funds at retirement to purchase post-retirement annuities and reduce dependence on family and the state,” says Chennells.

On the incentive side, those who don’t withdraw from the savings component of their retirement funds and only withdraw when they reach retirement age won’t be taxed anything on the first R550,000 that they withdraw.

In addition, all retirement savings not withdrawn under Two-Pot won’t be taxed on the capital gains accumulated in their funds until retirement. In the meantime, these untaxed gains will be invested to produce more income. “The tax saved by not withdrawing from your retirement fund until retirement can, over an average working life of 40 years, amount to almost five years of additional income,” explains Chennells.

Moreover, Two-Pot provides significant tax advantages for those who choose not to access their retirement savings until later in life, or only access minimal amounts. If one is under 65 years of age, for example, there is no tax on annual incomes below R95,000. If one is over 65, one can receive an income of up to R150,000 tax free. Those over 75 can receive up to R165,000 tax free.

The Two Pot taxing structure is also designed to discourage the withdrawal of large sums. This is primarily to prevent higher earners with access to other means from raiding their retirement savings. While a minimum tax rate of 18% applies to all withdrawals, higher earners are subject to their existing marginal income tax rates. In short, “withdrawals from the savings component of your retirement fund will be seen as income and taxed accordingly,” warns Chennells.

From a tax perspective too, the Two-Pot retirement system sends a clear savings message:

“Two Pot is a powerful savings tool. Those who contribute more and leave their contributions for longer stand to win big from a tax perspective,” says Chennells.

Chennells adds that the Corporate and Employee Benefits team at Discovery have developed a 'nifty calculator' which allows you to enter your own annual remuneration figures, including what your monthly contribution to your retirement fund is and then it estimates your own personal taxation should you wish to make a withdrawal once the new two-pot system kicks in on 1 September 2024.

“In addition, the calculator tells you by how much you would have to increase your contributions each month to make back the funds you just withdrew versus how many extra months / years you would need to work, to make back that money withdrawn from contributions,” he says.

Making the best choices

“The new retirement system provides a social relief mechanism for people in real crises to access emergency funds without incurring punitive interest rates, resorting to loan sharks or having to quit their jobs to access their retirement savings,” says Chennells.

That said, employees who make withdrawals from the savings component of their retirement funds every tax year will have significantly less to retire on than those haven’t withdrawn.

While in an ideal world, never accessing your retirement savings is the best choice, in the real-world life happens.

As a young person relying on a phone for employment, getting a new phone when one is lost could constitute an emergency. As a parent, paying school fees might fit the bill. Anyone might need emergency funds to cover unexpected medical or hospital fees. “That said, accessing your retirement savings for entertainment, clothes, holidays or other frivolous expenditures is to be avoided at all costs,” warns Chennells.

“It's also worth remembering that you pay tax on your withdrawal, so if you need the money for something short term, and you would be able to pay back a loan to meet that need fairly quickly, then it might make more sense to use a loan and pay the interest if it will amount to less than the tax on the withdrawal.”

Clear savings message

People should remember that Two-Pot is not based on a use-it-or-lose-it principle. There are no incentives to withdraw from retirement funds. In fact, just the opposite.

Two-Pot recognises that life involves financial challenges. To this end the new retirement system provides a mechanism to access a portion of one’s retirement savings from time to time. But Two-Pot is a lot more than quick withdrawals or easy loans. National savings months provides an opportunity to remind South Africans that “the primary intent of Two-Pot is to encourage - and reward - South Africans to save more for retirement, and keep these savings invested - and untouched - until retirement age,” concludes Chennells.