Old Mutual On The Money
Old Mutual On The Money
Michelle Acton Explains The Two-Pot Retirement System - Risks & Benefits
The new ‘Two Pot Retirement System’ comes into effect soon. Michelle Acton, a Retirement Reform Exec at Old Mutual, explained to our Head of Financial Education, John Manyike, how the new system will allow easier access to a portion of your retirement savings in an emergency. But with that benefit comes certain risks.
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Old Mutual 0:00
Welcome to the on the money podcast with John manyike.
John Manyike 0:04
Today we're talking two-Pots Retirement System. What is this? Two-Pot all about? Is it two pots? Is it three pots? You're going to learn about pots today. But I can't do this on my own. We're joined by Michelle Acton. Michelle is our retirement reform executive at old mutual so welcome.
Michelle Acton 0:22
Thanks, John, it's good to be here.
John Manyike 0:24
It's always awesome to talk to you, because you talk about Two-Pots. Like, I don't know, you know it's, it's in your blood. Why is it important for us to save for retirement?
Michelle Acton 0:33
So that's a really good question. And I think, to be honest, what most of us don't realize is one of our biggest assets we have is our salary every month, right? So you working or and you earning an income at some stage in your life, you're gonna get to the stage where you're no longer earning that income. And unfortunately, even after that, you've still got water and light to pay, food, to transport all of those costs to come through. And so the idea of saving for retirement is that when you get to the stage, whether it's 60 or 65 and you want to stop working or no longer able to earn an income due to health reasons, then you at least have an income producing asset, which is essentially your retirement fund. So the main aim for saving for retirement is trying to replace the income you earn while you're working when you retiring. So you don't have to work until you're 70, 80, or 90.
John Manyike 1:27
So in other words, while you're working, you are working for your money, but when you retire, the money must work for you.
Michelle Acton 1:34
Exactly. Well if you're smart, it works for you while you while you're working. Because, of course, one of the big things as part of what you earn you need to put away so that when you reach retirement, you can live on that income.
John Manyike 1:45
That's right. This buzzword on two part Retirement System. What is this all about?
Michelle Acton 1:51
So what it's trying to do is really make our retirement fund serve two purposes. Okay? So we know for the vast majority of working South Africans. If you work for an employer, for example, you're putting money away to a retirement fund. However, what we find is happening is, when you change jobs, you end up cashing out your pension, which a lot of people do, and then start saving from scratch. But doing that, what doesn't happen is you don't you don't end up working for a lot longer, you're just reducing how much you've got saved for retirement. So the one thing two-pots trying to do is prevent people from doing that. Yes, it's a person's money, yes, it's their savings, but absolutely they need to use it for retirement. So the first reason for bringing in the system is to try and increase what we call preservation, or lengthening how long you saving your for your retirement? The other aspect is, what we've also seen is, as mentioned, a lot of people who are working their biggest asset they own, or the only savings they have is their retirement fund. There's no others. And if anything, covid taught us, it's that we have the need of some sort of emergency savings, just in case for those things that we haven't quite prepared for, and covid was a great example. None of us could have predicted it. None of us could have foreseen the financial impact it would have had on families. And you don't want a situation then where people have to resign from their job to access their pension fund money, because then it puts you in a worse situation, because you still need to work. So what it's also doing is enabling some more frequent access to a portion of your retirement savings that you can access while still working without the need to change jobs. So it's trying to do two things, increase preservation on the one hand, but also ensure greater flexibility on the other.
John Manyike 3:37
Ybeah, I like what you said earlier that you know, if you're smart, your money can actually work for you while you're still working. Which brings me to the next question about a replacement ratio. Again, another buzzword That's that tends to be used by people who advocate saving for retirement. What is a replacement ratio?
Michelle Acton 3:57
Sure, that is a term that we seem to throw around, but not everyone fully understands. So replacement ratio is a way. We're trying to simplify the ratio of how much you earn after retirement with what you earned before. So let me give you an example. If you've done the maths and you work out when you retire, you need to get in an income of seven and a half 1000 Rand a month, and that's how much you need to cover your rent and your food and some luxuries and medical or whatever it is. Then that's the number if you were earning 10,000 Rand when you retired. Then, of course, seven and a half 1000 Rand of 10,000 is 75% right? And that's basically, then says you aiming for a placement ratio of 75% and that's an important part of retirement planning, right? Step one, you and I, if we sit down and do retirement planning, you got to cut it's hard, because we've still got so many years to go to retirement, but, but essentially, you want to give an estimate of saying, right, how much would I need at retirement compared to how much I earn now? And. And that gives you a feel of what we call replacement ratio. And we know, on average, we talk about a replacement ratio of 70 to 75% is what you're targeting. You don't necessarily need to earn as much as your full salary in retirement for a good number of reasons. But for some people, that might be as low as 50 if the kids are moving out and your house is paid off, etc, and for others, it might be as high as 100% for those that might have started having kids later in life or etc. So, so I think for every person, it's a different number, but it's important as an individual to understand what your replacement ratio should be, so that you've got an idea of what you need to be targeting.
John Manyike 5:36
So, so in a nutshell, ideally, on average, you need to at least retain 70% of your last paycheck. That's what your retirement should be able to buy you to replace your salary in order to maintain the same standard of living.
Michelle Acton 5:53
To maintain the same standard of living. Yeah, absolutely. Yeah.
John Manyike 5:56
All right, so now let's go to the mechanics of the two pots. Some people say it's three pots. Others, is two pots. Retirement System, is it three pots? Is it two pots?
Michelle Acton 6:08
What is it four pots? Is it five pots? It depends how you interpret it. So I think at a very, very high level, the new system is bringing in two new parts, right? Okay, and I can go in detail on what those two pots are, but just as a very high level, we've got what we call a savings part and a retirement pot. So those are two new pots that are starting. It's all part of the same fund. So think of it more of an accounting element of splitting money, but it's all still part of the same retirement fund. You're not changing retirement funds. Money's not moving. It's just an element. However, the third pot is your existing savings. So what happens with the new two pot system is the first step is that it says, whatever you've got saved up to September, that money, let's say you've saved 250,000 Rand in your retirement fund that goes into what we call your vested pot, which is your old money. It's sitting there with ring fenced Okay, that's your one pot. And then, of course, you've got two new pots for future money, and those become that's why we talk about three pots. But your third pot is your existing money, and the two new parts are what the system brings in moving forward.
John Manyike 7:12
So put simply, it's actually two pots. One is your savings pot, the other one is your retirement pot. Right now, people are excited about the first of September, because that's where, officially, government is going to permit people to be able to access their pension. But how much can one access from the first of September?
Michelle Acton 7:34
Okay, so if we go back to the conversation of our three pots, yes, so what will happen on the first of September? Step one is, all your existing savings will go into your vested pots. Okay? So that's the first part. Then the second pot will be 10% of your money, capped at 30,000 will be transferred out of what you've saved into as an opening balance, into your savings pot, okay. And then what will happen is post that at the end of September, say, for example, your first month contributions go in, and 1/3 of your contributions will now be allocated to the savings pot, and two thirds of your contributions will then be allocated to your retirement pot. So the money is going to be split from an accounting perspective. Again, as I said, the sum of the three pots is how much you've got saved towards retirement. Now the idea is, when you reach retirement, what's in your savings pot will be your lump sum at retirement, and what's in your retirement part will be your income that's used to secure so we were discussing that replacement ratio of 75% yes, that's basically what your retirement pot will will secure you. So your money going forward is split 1/3 two thirds into these two pots. So now you ask me, What about what can I access from September? Yes, and I think the first thing to notice it's probably not going to be on the first of September, because, as you can imagine, there's a lot of admin stuff that needs to happen before and system changes that need to be done before one can access. But once that is all done, essentially whatever's in a person's savings pot, they will be able to access once per tax year with a minimum amount of 2000 Rand. So if we go back to that example I was mentioning earlier in your starting value or your saving vested amount you've had up until now, let's say it's 250,000 Rand. Okay, 10% of that, capped at 30,000 will be transferred as an opening balance, right? So that means in your savings pot on day one, effectively, you will have 25,000 Rand sitting there, which you can access. Remember the example I used was, was 250,000 Yes, yes. If we go to the example where you might have saved a million Rand up until now, then 10% cap to 30,000 means that 30,000 will be moved into your savings project, right? So now you've got your amount of money in the savings part. Essentially, you can come forward and access that at any time. So if you decide you want to. Access it in September, because you have an emergency in September. Then, of course, the amount of money in that savings pot will be there. But over time, if you don't, and you leave it there, over time, you'll add more contributions in there, and that savings pot can become quite, say, sizable that you and you can access it whatever's in that part at any time.
John Manyike 10:21
Okay, so what happened to the contributions before the first of September? Where does that money go?
Michelle Acton 10:28
So that will be sitting in what I like to nickname your old money, right? Because what will happen is, at the end of every month, for example, or if you're part of a retirement annuity, whenever you had put your money in there, it gets allocated. So all of that will be part of your balance. Any contributions before September will be part of your savings balance as accepted the first of September. So that will all go into what we call your vested pot, okay, and all the old rules still apply to the old money. Yeah, okay, and that's really, really important to remember. So earlier, I mentioned that people change jobs and they can cash out their pension for this vested pot, those rules will still apply. It's only the new money where we split 1/3 into the savings part and two thirds into the retirement pot. And the retirement pot you cannot access until you reach retirement at all, so the only pot of you can access moving forward, is what's in your savings pot. But bearing in mind, if there's nothing in your savings pot, there's nothing to access, yeah, so it's important to keep that building up, but also whatever's in that savings pot becomes your lump sum at retirement. So if you've got an empty savings pot at retirement, you also don't have any lump sum at retirement.
John Manyike 11:39
Okay, there's one person we haven't mentioned about, you know how who's got a vested interest in everything that's happening? I know people are excited about being able to access their pension, or a portion of the pension from the first of September. What about the tax man?
Michelle Acton 11:53
Ah, yeah. Unfortunately, like, we know, what are the two certainties in life, death and taxes? Yes. So essentially, whatever contributions go into your retirement fund, though, that money is essentially gone in tax free, right? Because it goes in before you pay tax on your salary. So that's what we call tax deductible, or you get a tax deduction, yes, and at the moment, I think you can put up to 27 and a half percent of your salary into a retirement fund to claim that deduction. Now, so the money's gone in there, it's invested, tax free, lively, it's getting dividends or not tax nothing is taxed while it's in that fund. Now, essentially, then what happens is, if you want to take that money out now, of course, SARS wants back the money that they'd originally that you'd saved when it went in. So any money coming out of your savings pot will be taxed at your personal marginal tax rate.
John Manyike 12:46
Okay, just walk us through that tax table, the marginal tax rate that you going to be have to pay your life.
Michelle Acton 12:53
Okay, so, so, essentially, if you look at a tax table, okay, it talks about how much you earn, and then it talks about, based on income brackets, what tax rate you need to pay? Okay, and the more you earn, the higher your tax rate? Yes, so an entry level marginal tax rate for someone earning just below 227,000 Rand a year is about 18% however, if you earning a lot more than that, that marginal tax rate could go all the way up to 45% so essentially, it's important for you as an individual to assess what is your annual income, and based on that, you'll be able to see what your marginal tax rate is.
John Manyike 13:32
So which means, when you withdraw this money, tax money is first going to be taking that portion before you get it
Michelle Acton 13:39
Absolutely and there's probably going to be a transaction fee charged, right? Just like when you go to the ATM and draw money, you get charged an ATM fee. There is, of course, a service you're doing here. So essentially, yes, step one is, if you say you want to draw the money, we need to take the admin fee and then, of course, go and ask SARS, how much tax do we need to pay? Because the other challenge is, if you have outstanding tax with sauce for whatever other reason, they can also take it from this money goodness, as they normally can do from your retirement fund.
John Manyike 14:10
I'm wondering now that we're saying that, what happens when a person is owing maintenance money and they are trying to withdraw the can? Can that be tampered with?
Michelle Acton 14:19
Okay, so if you've got a maintenance claim and it's submitted to the to the fund, the fund has an obligation in order to pay out against that. And so if the fund is busy processing that maintenance claim, then while that is happening, you also won't be able to access your savings pot claim.
John Manyike 14:37
Can I withdraw money from the savings pot? And then later on, decide, okay, maybe I got a bit of money or maybe a bonus. Can I transfer a lump sum back into the saving spot, because I withdrew the money some time ago?
Michelle Acton 14:52
So you've got to think about it like, absolutely you can put more money in. And we encourage that. You know, especially if you have bonuses or additional. Income, one of the best places to put it is in your retirement fund. However, you won't be able to directly put it into your savings pot. It will go into the fund, and any money going into the fund will be split two thirds to your retirement pot, 1/3 to your savings pot. So if you put 30,000 in as a lump sum, 10,000 will go to the savings part and 20,000 will go into the retirement.
John Manyike 15:24
So because the the savings pot, which is which is made up of 1/3 of your contribution, if you keep withdrawing from your 1/3 what is the disadvantage of withdrawing that money when you retire?
Michelle Acton 15:39
Sure, it has a massive impact. So there's a couple of things. So essentially, every time you withdrawing, we all know we talk about that 75% replacement ratio, right? And I mean rough numbers say you should be putting about 15% of your salary away every month for your working lifetime. And that should get you your 75% however, it assumes that the full 15% goes in and gets invested and stays there until retirement. If you keep in the long term, accessing that savings pot every time you can, you're basically dropping what that replacement ratio could actually be. And so yes, it affects your lump sum. So a lot of people, when you get to retirement, one of the big things they do with their lump sum at retirement is to settle outstanding debt, finish paying the bond, go on a fancy holiday, whatever it might be, but it's a really good, important kick start to get started into your retirement. If you have nothing in your savings pot, and you've only got money into your retirement pot, then you can use that to secure monthly income, which is great, but that's all you're going to get. There's going to only be a monthly income. So I think the one thing is, if you keep accessing your savings part, you won't have any lump sum. But the bigger one is, you're just going to make your opposite your chances of being financially secure in retirement. So much worse.
John Manyike 16:59
Yeah. So there are some savvy people out there who've been saving either through a retirement annuity, others have even, you know, have, you know, they have preservation funds. So supposedly I have five RAs, or maybe four RAs and a preservation fund come first of September. Does it mean I can literally access, let's say, assuming that you've got minimum of 300,000 in each RA or including a preservation fund. Does it mean I can actually access up to 30,000 per Retirement Contract?
Michelle Acton 17:38
Absolutely it does so. Essentially, each of these changes, especially with the seeding, are per contract, yes. So for every fund you've got, or contract within a fund you've got, they'll be really doing the seeding and you can access which is great, because it means for somebody who's been saving for a long time and has a decent amount saved, they'll then have a really healthy emergency savings that, if they don't touch. Nothing changes for them, right? Everything continues. The money still invested. You still earn investment return, and you continue leaving it. But if anything did happen, it means they could either access from one or many of them if they needed to. Yeah.
John Manyike 18:14
Okay, so what about those who have turned or who would have turned 55 years by the first of September, will the two pot system impact on them in the same way it would impact anyone?
Michelle Acton 18:25
If you're over 55 and that means you can retire, okay, but you haven't retired, then you're an active member of the fund. It will impact you for everybody. So essentially, this two part system is automatic. So it does. You don't have to do anything. You don't need to tick a box to say, I want to be in or not. It's automatic for everybody, except a very small group of people. And this small group of people is essentially those who were over 55 on the first of March 2021 who were part of a provident fund at that stage and are still part of that same fund. Those individuals will know who they are because they've previously been communicated when the old annuitization law changed in 2021 and they will be given a choice, do you want to move into the two pot system, or don't you? Except for that group, for everybody else, members of retirement funds, they will be automatically included.
John Manyike 19:24
So how does the two part system impact on public servants who are on the government employee pension fund? So are they affected the same way, or are they differences there?
Michelle Acton 19:38
They are affected the same way. So the two pot the legislation is impacting the GEPF as well. As I said, All funds in South Africa are going to be impacted all retirement funds. So they will also have that same concept of having the two pots, the savings pot and the retirement part and the 1/3 and the two thirds. The only difference is, is the fact that. GePf is what we call a defined benefit fund. So if you're a member of a fund, that's what we call a defined contribution fund. It basically means you put contributions in and your benefits that you get out at the end of the day is a sum of all your contributions plus investment return, right? It works like a really sexy tax efficient savings account. However, a defined benefit fund, which is how the GEPF works, is a lot more complicated than that, because it's what your benefits you get at retirement is not based on how much you've contributed, but it's based on your length of service and your salary at retirement. So they've got a concept which called pensionable service in a DB fund, and so with the split of 1/3 two thirds. Going forward for the GEPF, that split will be 1/3 of your pensionable service accrual will be allocated to the one and the other. So at the end of the day, will have a similar impact on members. They will be able to access on a regular basis. They will have a once off allocation to the savings part of 10% capped at 30,000 for initial but how the formula will work and how it'll impact them will be slightly different, because if somebody goes and withdraws money out of their savings pot in the GPF, over time, it will reduce their pensionable service for when they get to retirement and ultimately need to get a retirement benefit.
John Manyike 21:17
So does the two part system affect people who are married in community property versus people who are married out of community property. Does it affect them different?
Michelle Acton 21:28
No, it doesn't have any impact from that aspect. I think when it comes to the two part system, it looks at you as a member, and of course, your retirement funders is an asset to you. So I suppose the different types of marriage has very little impact on how the two pot system is going to work. Maybe it's if that marriage dissolves, that could be a different conversation.
John Manyike 21:51
Which takes me to the next question, is there any impact on people who are in the process of divorcing?
Michelle Acton 21:56
Not really. So essentially, remember what I mentioned, the sum of those three pots is your total value, yeah. And if you are going through a divorce, one of the first things that you do is, of course, you list all your assets. And for both the spouse and the non member spouse, they'll have listed of what their retirement fund is at a total amount, not how much is in each of the pots. And essentially, what, what happens during a divorce proceedings, once it's finished, is they'll decide how to split the assets. And very often, your retirement fund becomes part of those assets that are split. So if somebody gets divorced, and let's say, for example, the question is, we need to give 50% or it is a 5050, split to the to the non member spouse, then essentially, half of your retirement fund has to be taken out and pay after tax, of course, and paid over to that to that individual or the ex. Currently, that's how it works, of course, that we're based on one amount and how it works in the new world is still it'll be split equally. So if you've got money in your vested pot, your savings pot, in your retirement pot, all three of those will have 50% taken out, so that overall. So the net impact it's going to be money is taken from different parts. But I think the only important thing to remember about divorce is we're going into a world now where you we used to be able to access some of our money. However, if you've got divorce proceedings pending, you know we need to tell you. Need to tell the fund about it, because if they don't know, they don't know. And then the other thing is, while that divorce is being processed, you won't be able to access that savings part, because, of course, we need to keep it frozen until the divorce proceedings are finalized. But other than that, yeah, it's going to be exactly the same as it handles currently. There
John Manyike 23:36
There are people who are worried about resigning. They're thinking if I resign before first of September or versus resigning after first of September, what's the impact?
Michelle Acton 23:46
So that's the beauty of this vested pot, right? So remember, I mentioned earlier that you're going to have all your existing savings at the moment. So let's go back to that example I was using of saying you've got 250,000 Rand. If you resign beforehand, you would be able to take all of that money out in cash. Now, that money is then ring fenced into the what we call the vested pot. And the new world talks about a savings pot and a retirement pot, but that's for future money. You will always keep this vested pot. So if you resign after the fact, then the rules for this vested pot are still exactly what they were before. So you will still be able to take all of this money in cash. The difference for the resignation rules is applied to what happens in your savings pot and your retirement pot, which are slightly different rules compared to what you could use to be able to do for your vested pot.
John Manyike 24:36
Okay, so let's take a scenario of two people. One is accessing their their 1/3 every year, and the other one doesn't touch it until they retire. So at the point at which these two individuals retire, which one of the two is going to be better off?
Michelle Acton 24:56
In very simple terms, it'll be the person who didn't touch their savings part all along the. Yeah, and it's going to be for two reasons, as I mentioned earlier. First, they'll have the other person who doesn't access will have money sitting in the saving spot. And those saving pots are going to be built up to be very sizable amounts if you leave it and let it be invested. So if you haven't had an emergencies, or you've got other emergency savings plans and you haven't needed to touch it, number one, you'll have that piece, you'll be able to take a lump sum. But the other benefit is, if you take money out of your savings pot while you're still working, you will need to pay marginal tax rate, right? Which is quite a high tax rate when you look at that tax table we were referring to earlier. But when you reach retirement and you take your lump sum out, then all of a sudden it becomes your retirement tax table, which lets you take the first 550,000 Rand tax free. Yeah, so remember what I said earlier? The money going in hasn't seen the tax man. It's going to invest it tax free. It's, you know, it's earning return no with no tax. And then if you leave it to retirement, you get the opportunity to take it out with the first 100, 550 tax free. That's a massive benefit.
John Manyike 26:02
I think you touched on something important there. So when you retire, the first 550,000 is tax free, but if you are going to access your 1/3 of your saving spot that 550,000 does it apply or doesn't apply?
Michelle Acton 26:19
Not if you're accessing it while you're still working before you retire.
John Manyike 26:22
That doesn't apply. So which means you are actually paying the tax man because you are accessing the money before the time. Okay, exactly. Final question, if you were to give maybe your top three tips to people who are saving towards retirement, what would that be?
Michelle Acton 26:38
So I think the first thing is, do what I like to call a health check, or financial health check. We were discussing replacement ratios before and how much you need. Often, people think, just because they're a member of a retirement fund and they're having a deduction from their paycheck, they're all fine, right? They're saving enough. And what we find for a lot of those individuals is we they get to retirement and they realize, why have I not got enough? And pot of the reason was a that might not have been contributing high enough, you know? So what's really important is it doesn't hurt, and it's not something you have to do often, but every five years or so, have a think, how much will I need at retirement? There's a lot of calculators on the website. Speak to a financial advisor. How much should I be contributing? Okay, I'm at the right level, you know, so just check. That's the first thing. The second thing that's really, really important is to to not access your money while you're working. I know there's this belief it's my money and I need it now, but I interview and speak to many people after they've retired, and the messages that comes through are always the same, if only somebody had told me not to touch my money before. How am I going to survive? Because the job market for 65 and 70 year olds is not great. There's an absolute need to depend on family members and families for support. So it's really, really important you don't access because you might need it sooner, but you are also going to need it when you retire. When you retire. That's one of the sad things in South Africa at the moment. Is part of the problem with us having such a high social security dependency is that I old age state grant is just over two grand. That's 2000 Rand. So if you don't save for yourself, that's that's basically all that you've got as a safety net, which, for a lot of people's not, it's not enough. It really isn't enough. So I would say that the second thing I would tell people is, please try and do everything you can, not to exercise okay? And the third thing is, you're going to hear a lot about two parts over the next while, right? Yeah, read it. Keep yourself up to date. There's a lot of misunderstanding and misconceptions around how it's going to work, how much you're going to be able to access, etc. So it really becomes important to empower yourself with information around it, so that you're able to make a judgment call and try and stay away from accessing it. That savings pot, unless you really need it, because I think the power of an emergency is such that you will be able to lean on something you've saved to help you get through it. And it's not something that should happen annually or frequently. It's something that should be a once in a 10 year event type thing.
John Manyike 29:13
Wow. Wow. Michelle Acton, thank you so much. Thank you. That was very insightful, and I look forward to our next conversation, maybe post, first of September, when things are really happening and we'll see. Maybe the people who are accessing their pots will tell us something after that. Yeah, but thank you for for joining us.
Michelle Acton 29:33
Thanks John, it's been fun.
John Manyike 29:37
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