One of the biggest contributors to the South African retirement savings crisis over the years has been early access to retirement funds.
Contrary to global best practice, employees have been allowed to access their retirement savings when changing jobs with the result being that little would be left to build up a substantial savings portion over time and leading to inadequate income at the point of retirement.
In a move to address the SA retirement savings crisis, National Treasury published its proposal to limit access to retirement fund savings before retirement via a two-pot system.
The system aims to find the right balance to help members save for retirement while allowing some flexibility for short-term emergencies.
In the new system one third of member’s contributions will be invested in the accessible pot and two third in the inaccessible retirement pot.
Employees will have access to a third of their accessible pot in the case of emergencies, however, two thirds will be invested up until the date of retirement at which point it will be converted to an income.
The reforms will improve the level of savings in South Africa as it moves members away from full access to their funds, ensuring a better chance of adequate retirement provision.
All indications are that the reforms are sustainable and from the date of inception it will improve outcomes of member pension funds, provident funds, retirement annuities and preservation funds.
All existing savings however will continue to be accessible under the current rules and are not affected by the reforms.