Two-bucket system retirement will give SA pensions a massive boost, new study shows

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Around 80% of retirement fund members currently cash in all their retirement savings when they change jobs.
Around 80% of retirement fund members currently cash in all their retirement savings when they change jobs.
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  • The Actuarial Society's Retirement Matters Committee says the two-bucket system will be good for pension saving in South Africa.
  • The two-bucket system would allow people to withdraw some of their retirement savings before they retire while also preserving savings.
  • Around 80% of retirement fund members currently cash in all their retirement savings when they change jobs.

Allowing workers to have "two buckets" of savings in their retirement funds will likely boost pension savings in the country. This is according to the actuarial modelling done by the Retirement Matters Committee of the Actuarial Society of SA (ASSA).

The two-bucket system would allow people to withdraw some of their retirement savings before they retire while also preserving savings.

The committee said the proposed "two-bucket" system that National Treasury suggested in August would likely result in significantly higher monthly retirement income for pensioners.

The proposal followed growing calls by members of retirement funds to access part of their savings as they struggled during the pandemic.

As an attempt to prevent people from withdrawing everything they've saved for retirement, government saw the two-bucket system as a compromise. The idea is that one bucket could be used to provide short-term financial relief to retirement fund members, especially in periods of financial distress. The other bucket would be off-limits - to provide financial security at retirement.

Because the access to one bucket comes with the condition that the other portion of the retirement benefit cannot be touched until at least age 55, the system could solve SA's retirement savings problem, said Natasha Huggett-Henchie, the principal consulting actuary at NMG Consultants and Actuaries, and a member of the ASSA committee.  

She said the portion of savings left untouched would spend enough time in the fund to benefit from compound interest growth.

The committee modelled two scenarios. In the first scenario, where a person withdraws all their retirement savings every time they change jobs, they'll be hard-pressed to get a pension that covers even 20% of what they used to earn.

But in the second scenario, where the two-bucket system is in place, there would be better outcomes. A retirement fund member who joined at age 20 and only had access to a third of their savings could get around a third of what they used to earn as a pension - if they withdrew the full available amount in the access pot every five years until the age of 65.

SA's 'cashing out' problem

Fund administrator data showed that more than 80% of retirement fund members cash in their retirement benefits when changing jobs rather than preserving their savings, Huggett-Henchie said.

Even the punitive tax that SARS collects when people take their money in cash isn't deterring retirement fund members.

"In other words, members are making bad choices by prioritising their short-term needs and wants, sacrificing future investment growth on their benefits and risking double taxation resulting in lower pensions at retirement," said Huggett-Henchie.

However, the Retirement Matters Committee made several recommendations for consideration based on its modelling work.

Huggett-Henchie said the committee felt strongly that there should be absolutely no need-based rules. It said such a rule would be open to abuse and costly to administer.

"Our modelling indicates that forcing the compulsory two-thirds preservation actually improves outcomes at retirement, and members are going to find a way to borrow against or spend their one third anyway," she said.

The Committee also suggested that the regulators allow annual withdrawals, with a free once-off withdrawal and a free withdrawal every five years. It said any additional withdrawals should be subject to an administration fee. Furthermore, it recommended a rand limit on the withdrawal amount to avoid abuse by high-income earners.

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