Could pension loans be a thing now that we have the two pot system?

South Africans should be aware of the unintended consequences that may arise from making early withdrawals from the two-pot retirement fund set-up now that they have the option, warns Victor Bucarizza, wealth manager at GIB Financial Services.

This comes after the National Treasury and SARS said it will soon implement some changes and clarifications to the original proposals on the introduction of the new superannuation system.

Earlier this year, the Draft Revenue Law Amendment Bill 2022 was released for public comment, setting out proposals to implement a new system to provide more flexibility to members.

Balancing a solution to two problems

The system aims to strike a balance between two issues: maximizing retirement savings while minimizing early withdrawals; and allowing early access to retirement savings to deal with unforeseen events, such as the financial fallout from Covid-19.

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There may also be some unintended consequences, not the least of which will be serious strains on the administration of retirement funds, Bucarizza also warned. “The number of superannuation fund members drawing from their savings pot will affect trustees which may lead to payment delays. Such payments by their nature are likely to be unforeseen and time-sensitive events.”

“In addition, it will reopen the door to the practice of loans with pensions. Having some of the capital available may tempt banks to see it as a source of secured loans, a first step in enabling pension-backed lending, he said.

One pot of pensions for emergencies, the other for the sunset years

Bucarizza explained the implications of the new rules: “From the date the new system comes into force, members in the future will be able to make a taxable withdrawal per year from their savings ‘pot’, where up to up to one-third of your contributions can potentially be withdrawn. The remaining two-thirds or more of your retirement ‘pot’ should be kept until retirement and used to buy an annuity.”

“This is not retroactive – it is important for members to note that the new rules will not affect their retirement savings and contributions up to the date of application. These remaining savings and their subsequent investment returns will retain the their ‘vested rights’, meaning that the rules that applied when members made those contributions will continue to apply.”

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“All contributions will continue to benefit from the tax deduction subject to the existing limits. However, if a member exercises their right to make a withdrawal from their savings pot, this amount will be added to their taxable income for the year, thus nullifying the tax deduction. From then on they will not be allowed to make further withdrawals from the savings pot for a period of at least 12 months,” he explained.

Nothing changes for those who do not withdraw

Nothing will really change for those who didn’t plan to make a withdrawal from their retirement fund before retirement, Bucarizza said. “But those who will have to make this withdrawal of up to a third of their pre-retirement will exhaust the amount available as a lump sum at retirement. The main change is that they have more options in case of an unforeseen need.”

The amendments address the historical reality that many members with financial difficulties have in the past felt compelled to give up their jobs with the sole intention of “unlocking” their retirement savings, despite the large tax bill.

Compiled by Devina Haripersad.

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