The two-pot retirement system will improve outcomes for younger fund members who invest most of their contributions under the system, but it will not help members who are closer to retirement and who have been cashing out their savings regularly. In fact, the system could result in even worse outcomes.

This is according to modelling by Sanlam that was published in its 2023 Benchmark Survey.

National Treasury plans to implement the two-pot system on 1 March 2024.

Although it is called the two-pot system, members’ retirement savings will, in fact, be apportioned among three pots after implementation:

The retirement pot, to which two-thirds of contributions will be allocated. The contributions and investment growth must be preserved until the member retires.
The second pot is the savings pot, to which up to one-third of contributions can be allocated. Members will be able to access these savings without having to resign from their jobs.
The vested pot will house the retirement savings a member has accumulated before the two-pot system is implemented. These savings will be subject to the current rules of a fund.
According to the survey, South Africans have mixed feelings towards the two-pot system, with 57% of the 500 respondents sceptical, wary of the long-term impact on their retirement savings.

However, 21% said they would consider withdrawing funds in an emergency, while 13% expressed a willingness to access a portion of their benefits. A small segment, 8%, said they probably would take advantage of the new system. A resolute 23% stated they would not touch their savings at all.

Sanlam said the two-pot system has two conflicting objectives:

Increase preservation rates to improve retirement outcomes; and
Provide members with access to their retirement savings “in cases of emergency”.
With the above in mind, Sanlam conducted some modelling to evaluate the impact of the two-pot system on younger and older retirement fund members.

**Impact on a younger member**

Sandra joined a retirement fund through her employer at age 20. She resigns and changes jobs every seven years until she reaches the age of 50. Every time she resigns, she withdraws her all retirement fund savings.

At retirement, Sandra ends up with retirement savings of R2.7 million. This scenario assumes an annualised investment return of 11%, a contribution rate of 11%, a salary of R122 000, and salary growth of 3%. Sandra will retire with even less if she continues to change jobs and withdraw her savings after the age of 50.

The two-pot system is implemented four years before Sandra joined a retirement fund. By then, she has R85 000 in her vested pot.

Sandra withdraws the funds in her savings pot throughout her career as the cash becomes available. She also cashes out the money in her vested pot by resigning. Only the money in the retirement pot is untouched – because it cannot be accessed until retirement. In this scenario, Sandra accumulates R8.6m by the time she retires, which is 3.25 times better than the outcome when she could cash out all her retirement savings. (All the other assumptions are the same.)

Sandra can improve her outcome even more by not withdrawing from the vested pot. If she accesses the funds in her savings pot only, her retirement savings will increase to R14.8m, 5.5 times better than her current outcome of R2.7m.

The best-case scenario for any member of a retirement fund is not to withdraw any retirement savings. If Sandra does not exercise her option to withdraw from the savings pot and fully preserves all her assets throughout her working life, she will retire with R19m, or 7.2 times more than the current situation.

This modelling indicates the compulsory preservation built into the two-pot system is expected significantly to improve younger members’ retirement outcomes, even in the worst-case scenario, where a younger member withdraws from the vested and the savings pots.

**Impact on an older member**

Thabiso joined a retirement fund at the age of 20. He has resigned from his job every seven years and withdrawn his savings.

The two-pot system is implemented when Thabiso is 51.

At age 50, he stops resigning and cashing out his retirement savings, but he continues to withdraw from the savings pot.

When he retires, Thabiso has retirement savings of only R1.4m. This scenario assumes an annualised investment return of 11%, a contribution rate of 12%, and salary growth of 3%. If Thabiso had fully preserved his savings throughout his career, he would retire with R19m.

One way in which Thabiso can improve his retirement outcome is not to make withdrawals from the savings pot from the age of 50. This could improve his retirement savings by about R300 000.

The problem is that many retirement fund members are in Thabiso’s situation, and the two-pot system will solve their predicament. Indeed, the ability to access their funds in the savings pot without having to resign could make their situation worse.

The modelling highlights that the ability of the two-pot system to improve retirement outcomes hinges on a long term of contributions to the forced preservation retirement pot.

**Complexities facing trustees**

David Gluckman, the chairman of the Sanlam Umbrella Fund, said the two-pot system is the most complex piece of retirement legislation to be introduced in South Africa. He said the complexities and burdens it will place on trustees will fuel the trend towards umbrella funds.

The Benchmark Survey highlighted the challenges that trustees will face in setting and refining their funds’ investment strategies to accommodate the two-pot system.

Trustees will have to consider their investment objectives, Regulation 28 implications, liquidity risks, and their membership profile. Importantly, members’ financial sophistication, level of preservation, contribution rates, risk profiles and tolerance are all important in decision-making, as these will drive the future behaviours of members.

Trustees could consider retaining the current long-term investment strategy for both the savings pot and the retirement pot. The risk with this option is that members wishing to withdraw their assets could crystallise their losses if they are invested in an aggressive strategy that has been underperforming.

It is likely that product houses will have issues with accommodating the required liquidity in some of their portfolios, particularly those with higher exposure to alternative and private equity investments.

The second option is to offer a lower-risk-profiled portfolio for the savings pot relative to the retirement pot.

The risk here is that members wishing to remain invested and not withdraw any savings until normal retirement age will face lower investment returns on their assets. This will have severe consequences for their retirement fund savings in the long run. Effectively, members who preserve everything will be punished. Returning to Sandra’s high-road two-pot scenario, her outcome may be impacted significantly: a reduction in retirement savings from R19m to R16m, assuming money-market rates on the savings pot.

This is an important point, and the industry should aim not to disadvantage one group of members to bring benefits to another group.

There are at least two ways in which trustees could combat this risk:

If trustees consider a lower-risk-profiled portfolio for the savings pot, the retirement pot could be invested more aggressively to compensate for the lower expected return.
Instead of using money-market strategies, trustees could consider an asymmetric strategy that offers capital growth with relatively lower levels of volatility.
A third option is to consider providing member choice portfolios for assets invested in the savings pot, coupled with a “default” savings strategy for members who do not wish to choose their own portfolios. Although this would not be the direction taken for most funds, it could be an option for mega funds that have higher governance models.

Although this option would give members the freedom to make their own decisions depending on their shorter-term needs, the risks cannot be ignored. For instance, most members may not have the financial sophistication to make these complex investment decisions. Another issue is that the risk of switching between portfolios could result in the crystallisation of losses.

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Two-pot retirement system

###### Is retiring comfortably a reality?

Many individuals are uncertain about whether they will be able to live a comfortable life during retirement. The idea of retirement and potentially not having enough is a daunting thought for most. 

The purpose of this blog is not to sow fear but rather encouragement. Every day you procrastinate to start planning for retirement has a massive ripple effect on your income during retirement. We want to encourage you to come meet with us so that we can help pave the way for a financially wealthy retirement. 

Start now and become the one who can, later on, enjoy the fruit of all your hard labour. Always remember the words of Francis Drake: "Great things have small beginnings".

Below an article showing some interesting statistics with regards to retirement. Enjoy the read.

[Click here for article](https://www.moneyweb.co.za/financial-advisor-views/is-retiring-comfortably-a-reality/)

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Retirement

###### What is a Foreign Pension Trust (“FPT”)?

A FPT is a non-resident pension scheme established under Trust and constituted by way of Trust Deed. The FPT has scheme rules, and its proper law is not South African.

The FPT is established in a foreign jurisdiction where its Beneficiaries are potentially exempt from income tax on any annuities or lump sums paid pursuant to its pension scheme, provided that the individual to whom the annuity or lump sum is payable is not resident, for income tax purposes, in that jurisdiction. The scheme intends to offer a financial product which will be housed in the FPT which is intended to be a pension scheme which will offer South African resident investors access to offshore hard currency retirement investment options with Estate and succession planning Benefits.

###### Implications of FPT

However, a recent binding class ruling by the South African Revenue Service (SARS) published on 12 August 2022 has highlighted the importance of understanding the product and its rules, and the potential tax implications. Investors and potential investors of a FPT should therefore take note of the below income tax, capital gains tax and Estate Duty implications for resident Beneficiaries of a Foreign Pension Trust in light of this ruling:

1. SARS ruled that a FPT is not a pension fund, provident fund or a retirement annuity fund as defined in in the Income Tax Act and section 1(1) in the Estate Duty Act.
2. Deductions of contributions to a pension fund, provident fund or retirement annuity fund will not apply in respect of contributions made by Investors to the FPT.
3. A contribution made by an Investor will not constitute as a donation and will not apply to Investors in respect of contributions made to the FPT.
4. An Investor will, upon becoming a Beneficiary/member of the FPT, acquire a personal right against the Trustees of the FPT to administer the Trust appropriately, and a vested personal right to the income and capital of the FPT, subject to the time-based restrictions stipulated in the scheme rules.
5. An Investor’s personal right to the income and capital of the FPT will have a base cost equal to the contribution made by the Investor. 
6. The anti-avoidance provision contained in Section 7(1) of the Income Tax Act will apply to the Investors of the FPT. 
7. When an Investor dies prior to normal retirement date, the vested personal right will constitute “property” in terms of section 3 of the Estate Duty Act. The right will form part of the deceased Investor’s dutiable Estate.
8. When an Investor dies prior to normal retirement date, he or she will be deemed to have disposed of his or her vested personal right before his or her death for market value and will be subject to capital gains tax.
9. When an Investor reaches normal retirement date as stipulated in the scheme rules, any annuity paid by the FPT to the Investor will constitute an annuity for purposes of the Act which must be included in the gross income of the Investor.
10. On the death of an Investor after normal retirement date, the right to an annuity will constitute “property” as defined in paragraph ( b) of the definition of “property” in section 3 of the Estate Duty Act. The right to an annuity will fall within the dutiable Estate of the deceased Investor.
11. On the death of an Investor after normal retirement date, the Investor will be deemed to have disposed of the right to an annuity for market value and be subject to capital gains tax. The Investor will also be deemed to have disposed of his or her right to lump sum Benefits for market value.

###### Conclusion

The binding class ruling is valid for a period of five years from 11 July 2022.
Based on the above ruling, all prospective investors should apply caution when considering investing in an offshore pension.

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Foreign Pension Trust ("FPT")

## Gap Cover


Below a link to an educational piece on Gap Cover. 

[Money Clinic - Gap Cover](https://www.news24.com/fin24/money/money-clinic/money-clinic-what-exactly-is-gap-cover-and-why-is-it-important-20221112)

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