Chris Veegh, Independent Contributor

With the two-pot era upon us, the retirement industry has focused on the savings portion, understandably so, as this will allow members to access some of their funds. But this spotlight has pushed less-appealing aspects of the new legislation into the shadows. Gen Z may find the restrictions outweigh the benefits, while those straddling old and new rules could be frustrated by the increased complexity, eroded tax benefits, compulsory annuitisation and pay-out delays on emigration – a high price to access a modest amount of seed capital within a structure they could replicate themselves using a TFSA.

Not two pots, not simple: The regulator’s pension reforms originally targeted better retirement outcomes, by asking members to preserve more of their savings, but also by simplifying the system. To this end, Treasury sought to harmonise the tax and access rules across pension, provident and retirement annuity funds. The new regime is not that.

“Two-pot” is already a misnomer, if “pot” refers to specific access and annuitisation rules. For example, from 1 September 2024, provident fund members could have

• a savings pot, which can be accessed annually as a cash withdrawal
• a retirement pot, which must be converted into an annuity at retirement (with few exceptions)
• a vested benefit relating to their savings (plus subsequent returns) on 28 Feb 2021, which can be cashed out on resignation and at retirement
• a second vested benefit relating to contributions between 1 March 2021 and 31 August 2024 (plus subsequent returns), which can be fully cashed out on resigning, but only one-third at retirement.

Some members will want to exercise these options, so administrators must track and disclose the value of the different pots, possibly for decades; the vested amounts will become increasingly more significant as returns compound. Those who want to tailor each pot’s asset mix and glide path to its specific purpose and time horizon will require multiple portfolios. The administrator must ensure these stay within the parameters of Regulation 28.

Some tax benefits fall away: Withdrawals from the savings pot will be taxed as income, not as a lump sum. Given that the first R726k per the withdrawal lump sum tax table is taxed at 18% or less, drawing from the savings pot will probably attract a higher tax rate.  Not only that, they may also pay tax on investment income that would be untaxed in a TFSA, or even a normal savings account with its annual R23,400 tax exemption. New members who keep cleaning out their savings pot also lose the tax-free payout they could have had at retirement.

No guaranteed retirement lump sum: Upon retirement, fund members must use their retirement and two-thirds of their vested pot (other than the first vested provident fund pot) to buy an annuity. Those without a vested portion, and an empty savings pot, get no lump sum.

Transfer risk: On changing jobs, members must ensure that any fund transfers end up in the correct pot on the other side, or else they lose their vested rights. The fund industry would prefer to see more savings locked up until (and thus beyond) retirement.

Emigration: The three-year holding period on emigration currently affects RAs, and preservation fund members who have made their one permitted withdrawal. The retirement pot will now also be subject to this waiting period. That makes it harder for Gen Z to leave.

It will take decades before vested rights disappear; until then, they promise to be a source of frustration and conflict and costly financial advice. The pay-off is more sustainable retirements for Gen Z. But they are trapped in a system where they carry all the investment risk, yet are subject to asset and withdrawal limits, and diminishing tax benefits. They may want to avoid it altogether.

ENDS