Need to access your retirement savings early? What you need know

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Need to access your retirement savings early? What you need know

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| Clement Manyathela speaks to Blessing Utete, managing executive for Old Mutual Corporate Consultants on early retirement savings.

  • Tax
  • Draft Bill
  • Retirement savings
  • National treaasury

One of the biggest contributors to the South African retirement savings crisis over the years has been early access to retirement funds.

National Treasury has now published a draft bill aimed at encouraging citizens to have easily accessible savings, while also ringfencing funds meant for retirement.

The so-called two-pot system will allow individuals to contribute one-third of savings into an account that can be accessible at any time, while two-thirds must only become available at retirement.

These discussions have been on the agenda for almost a decade but have intensified after the economic damage caused by the COVID-19 pandemic with mounting calls on the government to make retirement provisions more readily accessible.

Clement Manyathela speaks to Blessing Utete, managing executive for Old Mutual Corporate Consultants on the draft bill.

What does retiring comfortably mean? We use a concept called the net replacement ratio. This means that when you retire, you should be able to have saved enough money to have a pension of 70% of your salary. Statistics show that 6% of people can get to that level. So it is challenging from a saving perspective.

Blessing Utete, managing executive for Old Mutual Corporate Consultants

With the majority of South Africans having suffered some form of income loss during the COVID-19 pandemic, saving for a rainy day was not an option. This has resulted in a significant shift in attitudes towards retirement savings.

We’re not big on saving as South Africans. The challenge has always been to ensure people preserve their retirement assets for the lifetime of their careers until they get to retirement. Unfortunately, we have this big problem that allows people to take their money when they resign. That caused a huge leakage in the system. This means when you take your money every time you change a job, you’re not going to have enough saved for a good retirement.

Blessing Utete, managing executive for Old Mutual Corporate Consultants

What Treasury has suggested is that we have a two pot system, one which is an accessible pot and the other for saving until retirement. The draft paper says the savings pot is where you will contribute one third of your retirement contribution, and the retirement pot will be for two-thirds of your contribution. The one-third will be for emergencies and financial distress.

Blessing Utete, managing executive for Old Mutual Corporate Consultants

The financial services sector hopes this deterrent will pave the way for better outcomes for retirement.

The actuarial society has done some calculations where it could mean a three time increase in the income someone will get by retirement. It also alleviates the issue of emergency needs.

Blessing Utete, managing executive for Old Mutual Corporate Consultants

The draft policy says the savings post must have in excess of R2,000 before it can be accessed. The other proposal is that it can only be accessed once a year.

We’re not trying to have retirement funds become transactional like bank accounts. They are long term savings vehicles. The savings funds can only be accessed once a year and we hope people will not access it often.

Blessing Utete, managing executive for Old Mutual Corporate Consultants

In terms of the cost implications for consumers, it’s estimated this structure could drive up the cost of fund administration.

If someone does access their fund, they should pay for the cost of transacting on the account. So the cost burden would be on the individual that accesses it, as opposed to the whole fund of members.

Blessing Utete, managing executive for Old Mutual Corporate Consultants

Currently, when you resign, you receive your first R25,000 tax free. Any amount above this is based on a scale of tax from 18% to 36%.

In this draft policy, it’s been suggested that beneficiaries are taxed at the marginal tax rate.

Whatever tax you’re paying on your salary is the rate you will pay on this retirement savings. So it’s a bit of a punitive tax than what we’ve seen when people resign. Hopefully, it’s a disincentive for people to take this money.

Blessing Utete, managing executive for Old Mutual Corporate Consultants

If you leave the money in the savings pot until retirement, you qualify for the retirement lump sum tax table, which allows beneficiaries to access R500,000 tax free. This then goes into the preferential scale. So if you get to retirement you can still enjoy the tax regime that’s preferential for retirement fund members.

Blessing Utete, managing executive for Old Mutual Corporate Consultants

Listen to the full interview below.

This article first appeared on 702 : Need to access your retirement savings early? What you need know

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