Two-pot isn’t free money
|Published
There are many misconceptions around Two-pot system. Picture: Towfiqu barbhuiya via Unsplash.
By Nicola Mawson
THERE are many misconceptions around two-pot – a new pension fund vehicle that comes into effect next week Sunday – including that it is free money that can be used to take that much longed for overseas trip.
This, however, is not the case because the amount of cash that can be withdrawn is subject to tax, as well as fees, and is capped.
As Brett Ladouce, a pension funds lawyer and the author of the book Pensions for Palookas explained, “it’s not free money”. He told Personal Finance that the system essentially created three pots: investments made up until next Saturday go into what is known as a vested pot, money invested after September 1 is split 1/3 into the savings pot, and 2/3 into a retirement pot – the latter two being creations under the new legislation.
When it comes to the so-called vested pot, the current situation remains in that people who retire or change jobs can still access that money, said Ladouce. From September 1, any amount above R2 000 can be taken out from savings, but these withdrawals are subject to tax at a sliding scale, he pointed out.
Withdrawals, Ladouce explained, will have the effect of reducing retirement funds when a member quits working.
When it comes to the retirement pot, investors need to put that amount away into living annuities that pay out a “salary” each month when they stop working, he added. Ladouce also noted that one can also invest the vested pot into such a vehicle. “Remember, the purpose of saving for retirement is to give you that annuity income that replaces income for you when you can no longer work.”
In addition, tax can eat away at what has been put away. Alexforbes’ Vickie Lange, Head of Best Practice, explained that, should someone dip into the savings pot, they pay a marginal tax rate. Waiting for retirement means that the retirement tax table applies and the first R550 000 is tax free.
There are also fees that will need to be paid. These will differ from administrator to administrator, said Lange. “There is no right or wrong way for the fees to apply. What’s important is that the fee is fair, transparent, equitable and ensures that quality administration services are provided on a safe and sustainable basis,” she said.
Other aspects that Lange pointed out include that, should a member be going through a divorce or be faced with a judgment that is before the court, funds need to restrict access to the savings to ensure that there is enough in them to cover any rulings.
Lange estimated that this new regime could improve new members’ retirement outcomes by between two and 2.5 times compared to those under the current system. This, she said, is because people will have to preserve their retirement pots fully before retirement.
“This change is important because the main reason for members not being able to afford to retire is because only one in 10 members preserve their retirement savings when changing jobs,” said Lange.
Ladouce added that the savings pot should really only be used for emergencies, such an unforeseen hospital stay. It may, however, make sense to use it to pay down debt that attracts a high interest rate and then be disciplined and invest those monthly debt payments for retirement.
Kia Brokers managing member, Gerald Kahn, tackles various myths:
- I will be able to access one-third of my retirement fund
You will only be able to withdraw the amount that is in your Savings Component if this is more than R2 000.
- I can access R30 000 each year from my retirement fund
You can only access what is in your Savings Component per tax year, with a minimum of R2 000.
- I can access all my money in my retirement fund if I resign.
You can only withdraw what is in your Vested and Savings Components if your resign, not what is in your Retirement Component.
- I will always be able to withdraw if I have enough in my Savings Component
You may not be able to withdraw your Savings Component if:
- You have a pension backed home loan.
- You owe your employer damages for misconduct or theft.
- You have a divorce order pending.
- If you owe maintenance the court has ordered for the money to be recovered from your fund
Only my contributions form part of the two-pot System
- Your and your employer’s contributions (less costs) are allocated at a ratio of 1/3 into savings, and the balance into the Retirement Component.
- I can transfer funds from my Vested Component to my Savings Component
- You can only transfer funds from your Vested Component to your Retirement Component and from your Savings Component to your Retirement Component.
- I must withdraw from my Savings Component every year
You do not have to withdraw every year.
PERSONAL FINANCE