by | Mar 1, 2022

Covid has been a difficult period for many households, companies and individuals alike. The government has noted this and has been looking for ways to support consumers by providing temporary relief.

There is an article that Adriaan Kruger wrote for Moneyweb, which I include below that goes more into this.

Rising food and petrol prices, amid high unemployment and sluggish economic growth – together with increasing interest rates – are putting the squeeze on many people. In this scenario, many see government’s plan to restructure the pension fund industry to allow immediate access to retirement funds as a solution to their immediate cash flow problems.

If the number of queries after previous articles on the proposed ‘two-pot’ pension fund system is anything to go by, households are eager to dip into their retirement savings.

When can one access those funds?

This also lends credibility to anecdotes about people who resign from their jobs for the sole reason of being able to access their pension funds. In fact, a study by National Treasury has found enough evidence of this to launch the restructuring of the pension fund industry.

Cash-strapped citizens look at the proposals only as far as the part that deals with access to their pensions is concerned, and how soon this will be possible.

Green light expected

Michelle Acton, key account manager at Old Mutual Corporate, says the finance minister is under “extreme pressure” from weary consumers to deliver on the reforms almost immediately.

“It is the most anticipated [topic] of Finance Minister Enoch Godongwana’s budget speech this week,” she says.

“While it is unlikely that a roll-out plan will be detailed in the budget speech, we can expect Godongwana to give the reforms the green light and, subsequently, assurances that government would take into account the time required by industry to comply with the legislation,” says Acton.

The current tax treatment of retirement savings is based on contributions being exempt from tax, while growth within the retirement vehicle is also not taxed immediately. Thus, contributing to a retirement funds has tax advantages. After retirement, pensioners are taxed when benefits are paid.

“The proposals deal quite extensively with the shortcomings of this existing tax treatment in relation to the two-pot system and suggests four alternative proposals,” says Acton.

“We would prefer if the tax system does not change as the extent of the pension fund reforms and requirement for fund administrators are already substantial.

“Currently, the tax implications around retirement funding are well established and understood. It would be wise not to add another layer of complexity, but instead maintain the current stability and integrity.”

Don’t expect a quick fix …

Acton says it is also important that Godongwana makes pension fund members aware that if the two-pot system is given the green light, it will still take some time to get the required legislation passed, and the current administration systems updated to allow for this new system.

The changes to the Pension Fund Act will be a lengthy process. Only the first few steps are in process. Government only called for public comment on the proposals at the beginning of the year, with actual changes to legislation to follow only after consultation.

Once the new legislation is ready, it needs to follow the parliamentary process, and probably more public and industry input. Once passed into law, authorities will give industry a few months to implement changes.

Expanding the system

Treasury said in its announcement outlining the proposals that it will introduce legislation to enable automatic or mandatory enrolment to retirement funds to expand the system to include more employees, such as contract and temporary workers

It noted that part of the reform is to allow a “limited level of immediate access” under specific conditions (for those negatively impacted by the Covid-19 pandemic and similar emergencies).

“The proposed restructuring of retirement savings aims to address the situation where many members of funds find themselves cash strapped (because of not having any alternative or sufficient forms of short-term savings) and then they resign from their jobs to access their retirement savings,” according to the Treasury report

In conclusion:

Let’s wait so see what comes of the above in terms of the proposed framework. We will then from our end comment on the suitability of this for our clients and work forwards.