Old Mutual
Old Mutual
Old Mutual On The Money Chats to Michelle Acton about Retirement
Listen to the Old Mutual On the Money Podcast, hosted by Head of Financial Education, John Manyike, as Michelle Acton takes us through facts around effective retirement preparation, the pros and cons of retirement, and the new Pension Act around the two pot system.
John Manyike 00:05
Hi, Michelle.
Michelle Acton 00:06
Hi, John.
John Manyike 00:07
How are you?
Michelle Acton 00:08
I'm doing very well. Thank you.
John Manyike 00:09
Awesome, awesome. I'm very excited because we are talking about one of your favorite topic. In fact, you are very passionate about what we're going to be talking about today. And lots of news out there about the changes that are going to be taking place in terms of retirement funds. And, yeah, I think we're gonna hone in on that. But before we get there, maybe let’s start right at the beginning. What do you do at Old Mutual?
Michelle Acton 00:38
Sjoe, what do I do at Old Mutual? So, I work within the Old Mutual Corporate business working with retirement funds and pension funds, assisting in terms of designing, developing, and also on member education to helping people fully understand what they have when it comes to their pension fund.
John Manyike 00:55
And how long have you been involved in that space?
Michelle Acton 00:57
Sjoe, I've been involved in the financial services space for about 25 years now… giving my age away!
John Manyike 01:07
Okay, so let's talk about retirement, you know, what is retirement? Maybe let's start there. I mean, I think the first time I had somebody teach me about retirement, they said, retirement is one of the most depressing words you can find in the dictionary, you know, because it talks about isolation. What is retirement?
Michelle Acton 01:28
So, I think the definition of a retirement is beginning to change. But traditionally, retirement was at that stage where if you've been working your whole career, you'll get to a point where either you don't want to work anymore, or you can't work anymore, as you reach the retirement age. And you want to sit back and relax after your hard work. So really, retirement is that time where you no longer have to actually physically work for your income past a certain age. So, in South Africa, we refer to retirement ages of 60 or 65. So traditionally, you reach that age, and you stop working, and then hopefully start living on your savings.
John Manyike 02:04
But sometimes people do want to continue working, but the body wouldn't allow that?
Michelle Acton 02:07
Correct, correct. And I think what people don't realise, and often underestimate, is probably one of the biggest assets we have. It's not our house or our car, it's a salary. And you will eventually, in your life, get to a stage where you either can't work, as you mentioned, your employer is going to - the retirement age says you have to stop working from an employment contract perspective, and then you need to have something to fall back on. So, yeah, there are those two elements of either you want to, or you can't. And I think that's one of the reasons that, I mean, people go, ag, I'm not gonna retire. But that makes sense if you're 60, 65, or 70. But realistically, I don't know many 80 and 85 year olds that are still out there working. So from that aspect, we need to put some sort of savings in place.
John Manyike 02:54
So, what is a normal retirement age in South Africa? And how does it compare with other countries in the world?
Michelle Acton 03:00
Yes, I think South Africa has got a situation where there's almost two retirement dates that people refer to. So, the first one is what we call the date where you qualify for the old age state pension. So, government states quite clearly, if you reach 60, you then qualify for the old age date pension. And that's currently sitting at just about R1,900 a month. So, that date is 60 from a tax perspective. SARS recognizes that once you reach the age of 55, you're allowed to retire and get the tax benefits of retirement. And then overall, there's normally whatever age that your employer sets as the retirement age, and that's one thing in South Africa is according to employment laws. Employers can set a retirement age, and that's the age at which you leave the employer, and that age is very dependent on that employer. So, it will often depend on the industry you’re in, the type of work you do, etc. So, at the time, and ages vary from usually between 60 and 65. Now, you ask the question about how does that differ to the rest of the world. Within South Africa, we've stuck very tightly between the 60-65 number. We're seeing overseas, especially in a lot of European countries, that age is becoming older and older. So, you hear ages of retirement of 67 and 70. And a lot of that is because we're getting healthier, we are living longer, and so actually, you're physically able to work for longer than we used to. So, that varies, I think, around the world.
John Manyike 04:29
So, doesn't mean that there is a possibility that somebody can outlive their money?
Michelle Acton 04:35
Without a doubt. And I think it's getting more and more of a realistic situation. So, if we look at retire at working, right, so the average working person starts working at 25, for example, and finishes working, let's say, 65. Let's be optimistic. So, that's 40 years of working lifetime, which sounds like a really long time, especially if somebody's just starting out and you look forward, you think I'm never gonna get that old. But once you reach 65, what's your life expectancy? You don't know what date your date of death is, thank goodness. So essentially, what that means is you could stop working at 65, but work till 80. Well, I mean, live till 80 or 85. And we all know someone who's in their late 80s or early 90s. And then you start doing the math, and that's 20, 25 years of not earning an income. So, the real art of saving for retirement and being okay for retirement is to optimally use that time while you're working, those 40 years of saving, so that you've got enough to live on for, say, those 25 years. So, you know, if you save for 40, and live on it for 20, that number starts making sense. Problem is, if you're only saving for 20 years, you're not going to get - the money is not going to last you 20 years, unless of course, you're putting 50% of your salary away, which we know realistically is not going to happen, because most of us can't afford to save that much.
John Manyike 05:59
That’s true. In South Africa, we're sitting on a ticking time bomb. 66% of young people are unemployed. If they enter the job market at a very late stage, what is the outlook there?
Michelle Acton 06:16
Sure. And that's a very good point. In terms of that with people, I talked about 25 as the age, and we've got a lot of youth that are only starting to work in their early 30s. And then you're reducing your savings time down to 30 years, for example, which does put higher impact, especially when that same us are going to have longer life expectancies, we are getting healthier, medical advances, you know, just genuinely we're all living a lot longer. So, it is putting pressure, which demonstrates that there's even more importance on the fact that you need to be saving for most of your working life, when you are working. When you are earning a salary, you should be saving towards retirement, to ensure that when you don't/can't work anymore, you're not dependent on your family and your friends, or the old age state pension. But you actually dependent on yourself because you've managed to save. And I think you raised the points around the fact that South Africans, the youth, are not working. But one of the biggest other challenges we have in South Africa with so much unemployment and with so many people who haven't prepared for retirement, the dependency ratio is exceptionally high. So, it puts pressure on working South Africans now where the average working South African is/can be supporting up to 5 or 10 people on their salary. And so, saving for retirement seems like an additional pressure, but almost puts you in a position to break that cycle, where when you reach retirement, if you do save enough, it means you're not going to be one of those people, depending on your children or family members.
John Manyike 07:49
Then we've got another challenge with employers. Some employers who actually don't offer that benefit to their employees where there's no retirement plan provisioning, what is the problem?
Michelle Acton 08:01
So, in South Africa, the legislation states quite clearly that as an employer, you don't have to offer your staff pension benefits. But if you do, it has to be offered to everybody. So, most of your large employers will have retirement funds, but a lot of your small and medium companies have got other things that they need to focus on. There's financial challenges as employers, and so it's not unusual than employee doesn't offer. But then the onus is actually not on the employer to do that. It's you as an individual. It's that focus that when I start working, I actually need to start doing these boring adult things like insurance and saving for retirement. And I think part of that is, if you work for an employer that does have benefits and savings, fantastic, that gives you a vehicle in which to use, it's still your responsibility to make sure you are putting away enough, and that fund does have the benefits you need. If not, you might still need to top it up. But if you're an individual and employer doesn't give it to you, then you need to find your own vehicle. But there are retirement annuities and other ways of savings that you can, as an individual, still save for your retirement, so it shouldn't stop you saving for it.
John Manyike 09:12
So, if I were a shop steward of a trade union, and I say to you, well, I hear you, you're saying I should, it is my responsibility. But what happens when my employer gives me a little?
Michelle Acton 09:26
And that is one of the biggest challenges because salaries are low. And there's only so much that you can cut, you can get out of it you know. But the other challenge is, if you think it's too little now, wait till retirement when you have no income. And I think that's the problem because we don't have a great safety net in South Africa when it comes to retirement savings. So, if you don't save at all and you don't do anything, when you reach retirement, the only thing that's there for you is R1,900, which is the old age state pension. And that's it. So, if you were earning say 7,000 or 8,000. And around a month when you were working, the likelihood of you coming out on R1,900, it's not going to happen. It doesn't matter how you try and balance the books. And so, as uncomfortable it is, even if you can put 5% or 10% of your salary away into a retirement fund, it will make a big difference in supplementing that 1,900. So, you know that that's your base. But at least you want to get slightly more than that, which is where that conversation-
John Manyike 10:25
Aren’t there countries in the world that make you know, retirement benefit compulsory that every employer must provide?
Michelle Acton 10:35
There is, and it seems to be the most effective because mandating retirement fund coverage means you're forced to and it's that sort of thing that a lot of us don't like to do it. But if we're told to and we do it, we do it and then it actually is for our good, right. And so yes, around the world, there's a number of countries that have compulsory retirement funds savings, where they say you must put a certain amount. There's a lot of funds where it makes it compulsory to contribute to a government fund of some sorts, which means that actually, you know that that is - it gives you that security to know you're going to be okay. We are not there yet in South Africa. So, we know statistically there's only about 50% of working South Africans who are actually on a retirement fund, which is a low proportion. And most of the people not on a fund are those in the medium and smallest employers and the self-employed. And of course, your informal workers, people who don't earn a regular income. Often, it's very difficult for people to access or find the right place or know how to do that savings. So, part of the conversations that have been happening in the industry over the last year, two years, three years, has been this whole concept of, does government make it compulsory? Do they make it - the wording is around auto enrolment mandatory provision. Where they're looking at saying how can we make it compulsory for people to be members of retirement funds and make it compulsory for employers to provide. So, I think that's on the cards. But I think it's a long term away, because there's a lot of things that, you know, we can't put too much/more pressure, we know small businesses are taking strain. We know medium-sized businesses are taking strain. To put more pressure on the fact that on financially, they need to put these products together, retirement on top, it adds quite a bit more. And then also it impacts that whole minimum wage discussion, which is a whole conversation on its own and how it influences. So, I think we are on that journey in South Africa, I mean, there's been a whole lot of noise around retirement reform, and which is really exciting. But it's not… this stuff doesn't get fixed overnight, it's gonna - it's a journey, we're on that, we're going to need to follow the right steps.
John Manyike 12:40
There is this figure of 6% that's been talked about for many years. That only 6% of South Africans can actually retire comfortably, meaning 94% of our population, of not just the overall population, but a population of those who have a retirement benefit can actually retire comfortably. I mean, 94%?
Michelle Acton 13:03
It's a scary statistic, it is absolutely terrifying. And often I look at it. And I think as someone who works in the space, we failed, right, because if only 6% of the people who are using your products are retiring comfortably, then you haven't achieved at all what you should be achieving. But the honest truth is a lot of those reasons are structural reasons. And I'll give you a couple of examples. So, we don't have a minimum contribution rate in this country, if you contribute to retirement savings. And so, the magic number around the world for retirement savings is the 15%. So, there's no exact numbers, but I'm just using an approximate number. So, you should be saving about 15% of your salary every month should be going to some sort of retirement savings. But that is for your whole working career, okay. Now, what we find is a lot of people are contributing something, but it's nowhere near that number. So, they think they're okay because they’re in a retirement fund and find they're saving. They're ticking the box, but they're only putting 5% or 10% of their salary away. So, that's the first reason that we find that there's a lack of people not saving enough, is they're actually not putting enough into the system. And it's often a tick box approach. You know, I'm a member of a retirement fund, so I'm okay, that must mean I'm okay, that's me. And no one assesses that, am I okay, how much do I need, and how much you might need at retirement. And how much I might need at retirement might be two very different numbers based on our personal circumstances. So, all of those factors should be taken into account. Another reason and one of the very big reasons why people don't come out right, is this whole concept of preservation. Now, we have got a very unique legislation in South Africa around preservation and what that states is if you change jobs, you can cash out your pension fund, right. Because usually around the world if you put money in for pension, you don't touch that money till you reach retirement age. Are you ready to use it? But here, that doesn't happen at all. So, you're allowed to, you should preserve, but actually what people do when they change jobs is everyone gets all excited and things are, I'm coming into some great money, my pension is going to be paid out, I will use it to buy, expand on, etc, etc. And actually, what then happens is we were discussing earlier about that 40 years of working or 30 years. Now, if I change jobs, and every time I change jobs I cash out, then essentially, I'm dropping that period of time for which I can save to being less and less and less. And what we find happens realistically, is when people get to the age of like, 45, then people are, oh, wait, maybe I should look at retirement, and then they'll start saving. So we find people are only saving properly after they've cashed out, change jobs, cashed out. For those last like 10, 15, maybe 20 years of work. Now you can't say for 15 and 20 years, and expect that money to last you for 20 or 30 years when you've retired, the math doesn't work. It's not going to be there. And so that is one of the big challenges we have is around that whole concept, we find out as much as 90% of people when they change jobs, cash out their pension fund, that is a terrible statistic.
John Manyike 16:09
That’s a huge number.
Michelle Acton 16:11
It's a massive number. And so we really need to be looking structurally at changing that.
John Manyike 16:17
So, I thank you for demystifying the myth that just because I'm contributing towards a retirement fund, therefore I'm okay. So which brings me to the next question. What is the retirement replacement ratio? What do we mean by that?
Michelle Acton 16:33
Sure. Okay, so retirement replacement ratio looks at how much am I earning after retirement in relation to how much I was earning before I was retiring. So, let's say for example, when I reached my retirement date, I was earning R10,000 a month, if I had enough after I had retired. So, the month after I've retired with all my pension savings to buy me a pension of R7,500, that means that 75%, because I was earning 10,000, I now can earn seven and a half, that's a 75% replacement ratio. So, the concept of replacement ratio says how much do I need to save for, so that when I reach retirement, I can replace that proportion of my income? And it's a very good concept, because some people believe they should they have 100% or 50% and that's very individual. And I'll give you an example. So, if by the time, I've reached retirement, my house has paid off, my kids have moved out of home, etc, etc, I might need a lot less to live on, than say somebody who was renting, who's still got dependents at home, they might have been earning 10, spending the full 10. And they're gonna need a full 10 when they retire as well. So, that replacement ratio will vary. And it's a very individual number. And so, that's part of the whole retirement planning conversation. Like we speak about the fact if you're part of a retirement fund, that's great, box ticked, but you actually need to sit down with someone and say, “How much do I need at retirement? How much should I be putting away to get that based on what I'm planning?” And I mean, the numbers are, it's a long-term journey. So, it's not something you need to do every day. If you check the right numbers are going in, then they stay in. But yeah, the idea is, the replacement ratio gives you something to target at retirement, so you know how much money and the average that everybody uses is 75%. So, the logic says you shouldn't need all your salary. So, let's use a benchmark of 75%. So, depending on how you are to that 75% determines how close you are to the average person being able to retire.
John Manyike 18:35
Okay, so if I understand you correctly, in simple terms, you're saying: if I earn R10,000 in month, the day I retire, whatever contribution I was making towards retirement fund should actually buy me back a retirement annuity, equivalent to 75% of my last pay cheque in order to maintain the same standard of living once I retire.
Michelle Acton 19:02
That's 100% right.
John Manyike 19:04
But then you have a situation where there are people who retire, and they still paying a bond.
Michelle Acton 19:10
Correct.
John Manyike 19:10
So, what happens then?
Michelle Acton 19:11
So then, you might need a higher replacement version. So, when we get to retirement, and this is always the big thing as well, we talk about this retirement date and this retirement age, and it's probably the time where you are making the biggest financial decisions of your life, right. I mean, if you saved, and these are very rough back of the cigarette box type calculations, but if you've saved for your whole working lifetime, you've made sure you've saved enough, you've probably saved between 10 and 12 times your annual salary.
John Manyike 19:40
Please say that again.
Michelle Acton 19:42
You're probably… in order - when you reach retirement age, so if I'm retiring at 65, the amount that should be in my retirement funds should be equivalent to 10 to 12 times my annual salary, okay. So, that is a large amount of money. And the idea of is when you reach retirement, you now need to manage that properly, to make sure it lasts you over the rest of your life. So, you mentioned purchasing an annuity. So, what happens is actually I need to sit at retirement with my financial adviser and say, right, I've got 10 times my annual salary, I need to now buy a monthly income. Because if somebody gave me, this is realistic, but if someone gave me 10, times my annual salary when I turned 65, and said, here Michelle, make it last till you die, I'm gonna get that wrong. And I'm gonna get it wrong for a couple of reasons. Firstly, if there's money in my account, I'm very likely to spend it, I can try what I like. But something that should last 20 or 30 years will last five, and it'll be gone. So, the one aspect is to do a lump sum and expect it to last us. But the other aspect is you it becomes very difficult to budget, so you don't. So, the idea is you take that money, let's say, it's a million Rand, for example, and I take that million Rand and I want to go buy a pension. And so, you go to all the different insurers and find who can give you the best price and you buy a pension that locks you in with an income for the rest of your life box ticked. But what you also can do at retirement at that point, is it that you do have the option to take up to a third of it in cash, right. So, if I have that million, I can take, say, 300,000. And that gives me the opportunity at retirement to settle my bond. So, if you have that ability, you then can do that to say, actually, I'll settle my bond, and then I'll buy an income, and then that should give me an opportunity to secure my income, and then at least I'm financially as financially secure as one can be. Yeah, so often, when you - if you've got a bond still at retirement, that is definitely one of your options. The other is, you've just got to save a lot more, because you'll need a higher replacement ratio.
John Manyike 21:43
That's true, that's true. I mean, especially because when you retire, you will need medical aid, you will need other things. I mean, in order to maintain the same standard of living, I mean, the quality of, or our access to quality health care, very, very critical when you retire. And unfortunately, if you don't have a proper income, it means your standard of living will drop, and then actually you're retiring into poverty. Which brings me to the next question because government is certainly concerned about people who resign in order to access their pension, you know, to settle the debt or to do any other thing, you know, with pension money. Why is that a problem, you know, because I know some people have concerns about, why do you want to make changes? I mean, because it's my money. What are your views?
Michelle Acton 22:35
So, I think it comes back to the point I made earlier about that whole dependency ratio. So, we're currently at 6% of, you know, people who can actually retire. And to be honest, that number is not great, because it means the proportion of people in South Africa depending on an old age state grant is massive, it's not sustainable. And also, the dependency ratio on the working population is getting higher and higher. So, what National Treasury and government trying to achieve, is they’re saying what if people are saving for retirement, which we know, as I said, most people 50% of the population is saving, then it's absolutely critical that we make sure that money is ring fenced to retirement to give people the best chance they have, and financial security after retirement. And so, they looked at this and said, at the moment, people change jobs, as you mentioned, they're cashing out their pension. And often you change jobs for a better job, right. You get a new job, it's more salary. It's not even the reason you don't want to change jobs to access your pension, you know, you're going into high income, but you still cash out your pension, because you see that you've got the opportunity to. So, what government wants to look at is restricting that, because accessing your pension should not be linked to changing jobs. It should be linked to other aspects of your life, but not changing jobs.
John Manyike 23:55
So, what are those changes that are being proposed by government? I mean, I hear people are excited. I mean, we're hearing that very soon, people will be able to access their pension earlier?
Michelle Acton 24:08
Yes. So, I think that, I mean, this is the whole framing. National Treasury has titled it the new two pot system. And the idea of the two pot system is twofold. The first pot of two pots is to actually stop people accessing their pension when they change jobs. So, the idea is this. Now, we're going to be moving into a world of compulsory preservation. But the second element - and I'll take a step back - if there's one thing Covid showed us, is that the average South African has not got sufficient emergency savings, because there were a lot of people who got put very quickly into financial turmoil. And they didn't have any sort of savings to fall back on. The second thing that came out of Covid was the fact that there were people, small business owners working or self-employed individuals, even people who were working for large companies where because the financial pressure of Covid, salaries were cut, there was no business to be done. People might have had assets sitting in their retirement fund or in their retirement annuity fund, but they were unable to access them. And so, there was a big plea to say, “I've got money in my fund, please help me access it”. So, what Treasury's saying is actually, we need to change our system, right, we need to change our regime, because at the moment, the way we've currently got the system, it's not meeting people's needs, because it's not getting us to retirement. And actually, we need to enhance it. So, it's around the two pots and the one pot is around saying a portion of your contribution will be going into what they're calling a savings pot. So, a third of whatever you put away to retirement will go into the savings pot, and the other two thirds will go into what they call a retirement pot. So, you will have in your fund two pots, so it's in your retirement fund, in your retirement annuity, two pots, a savings pot and a retirement pot. Now that retirement pot will then stay there till you reach retirement. So, if you change jobs, you take it, you can't access it, you take it to a new fund, you can put it in a preservation fund, etc. But it will need to stay there. That savings pot is now designed to be your emergency savings fund. So, that money will continue to grow. And if you have an emergency, you can then access that money. Where before you would have to change jobs to access. So, there's no more link to changing jobs, you'll just run with these two pots, your money will go in, if you never touch that savings pot. So, if you never have an emergency, and you managed to build it when you get to retirement, that becomes your cash lump sum at retirement. But if life happens, and there is an emergency before then, then you have the ability to access this savings pot. So, it's going to be very different to how we do things now. But I think in the long term, it will make a massive difference because it means every one of those members who's now a member of a retirement fund will have an emergency savings pot as well as a retirement pot in their same vehicle.
John Manyike 27:01
So, in other words, you're saying, you know, now the retirement fund is going to be structured in such a way that you've got two pots. The first pot is a savings pot, which can be accessed in the case in the event of emergencies. The second one is a retirement pot, which cannot be accessed if you change jobs. What about a person who gets retrenched? Can they access the retirement pot?
Michelle Acton 27:28
No. So, that retirement pot is exactly for that, it's retirement. That is what your savings pot is. So, the idea is if you got retrenched, that is an emergency savings pot use, then you could draw out of your emergency savings pot. So, the legislation that we're seeing it now is not defining what an emergency is. That's for the likes of you and me to decide, that's our money. We've put it in the fund, if we need it, if we define an emergency, as you know, depending on our own personal circumstances. But if you leave that money there over time, then if you were retrenched, then you will be - after you've used the UIF because remember, in South Africa, retrenchment, you have the Unemployment Insurance Fund available for you as well, but it is definitely - that's one of the reasons that you could use it from that point of view.
John Manyike 28:15
So, in other words, this retirement pot, if I get retrenched and I still have another 10 years before I retire, and I'm unemployed, I will have money, but I can't access that money.
Michelle Acton 28:27
Correct.
John Manyike 28:28
Because it's part of their retirement pot. So, I just have to, according to that law, it means you just have to find a way to survive until you reach. Is it accessible on early retirement, which is 55 or should you wait for the normal retirement?
Michelle Acton 28:41
It’ll be accessible from early retirement, right when SARS starts allowing you to access it.
John Manyike 28:46
So, that's 55 years?
Michelle Acton 28:47
That will be 55, yeah, yeah. So, in that situation, you can start, and remember when it comes to accessibility, you’ll use that money to buy yourself a pension. So, it'll buy yourself an income later. And so yes, there will be possible situations where you’re retrenched, you've gone through UIF, you've spent your savings, but you will not be able to access this retirement pot until you reach retirement age of 55 onwards. And I think part of the logic is, I know that's going to create a massive change management and people to understand the difference. But what we have already as it is, is people if they are retrenched, they get their fund out, they spend it and then they're still stuck. So, at least this way, you know that there is some money that when you do reach retirement, you still going to have something to live on, to provide financial support.
John Manyike 29:36
So, in other words, this early access to pension actually talks to the savings pot, which potentially you can access for emergency, whichever way we define emergency, because I mean, I can have any emergency to buy a car.
Michelle Acton 29:51
You could. You could. Not sure how many cars over the while. So yes, I think there's been a lot of media focus on this whole being able to access your retirement fund over the last couple of years, especially since middle of last year, I think onwards. And the idea is actually, this is not touching existing money. So, one of the important things to remember is if I've got R100,000 in my retirement fund, when the changes come into play, then that money has still all the old rules are still applicable to it. So, if I resign, I can cash it out, etc. So, you've still got that. This is only referring to future money. So, contributions going forward. So, there's this massive assumption that I'm going to be able to access a third of my existing money when this comes into play. No, that's not the case. The only thing you'll be able to access, if you change jobs, you'll still be able to access what I'm going to call your “old money”, if I can put it like that or what the legislation refers to as a vested pot. You know, that money belongs to you, the rules don't change, etc, it's just going forward. So, if we look, realistically, it's gonna take a while to build it up. So, if I use a very simple example, if my contribution to my retirement fund is R600 a month, okay, that means I'll have R200 a month going into my savings pot, and I'll have R400 a month going into my retirement pot, right? It is gonna take a while for that savings pot to build up that you can buy a car, but you know, it will build up. And the idea is, if you leave it at an emergency event, usually shouldn't happen more than once every five years. I mean, it happened to all of us when we went through Covid. But if you properly manage your money and you properly plan, then actually you should have a rainy day fund elsewhere, not just sitting in the pension. But it will take a while because it's only going to get started. So it's not day one, you get all this money access. No, it's looking at going forward.
John Manyike 31:49
That's very significant. Because a lot of people are excited to “I'm going to be able to access my pension”. So, if I understand you correctly, you’re saying this piece of legislation, which is still being cooked, if I may use that term, when it gets effective, only then can you access the savings pot. But the reality is that you spoke about “old money” you spoke about “future money”. So, at the point at which this law becomes effective in the future, you still need to build a savings pot, because right now there will be zero in that part, is that correct?
Michelle Acton 32:25
That's 100% correct, yeah.
John Manyike 32:26
So, this excitement that what “I'm going to be able to access my pension early”, while I'm still waiting, it's actually going to take a while for you to build up enough savings for you to be able to access. Let's say, hypothetically, this law comes into effect on in the on the 1st of March 2023, as an example, then, the first month is end of March. Then that's the first time I'm now starting to build that savings pot, going, you know, over the next 12 months. So, effectively, it means people can - if it became a law in March next year, or 2023, it means I can only access it in 2024 thereabout, but again, depending on how much I've saved, is that correct?
Michelle Acton 33:15
That's correct. So, one of the two elements that they're putting as restrictions, if I can use that, on the savings pot is you must have at least R2,000 in the account minimum, okay. Because it stops you going to draw R100, R100, R100, because it's not designed to be that. This is a pension vehicle. It's a highly regulated, highly protected pension vehicle. So, it's not like your bank account. So, from that aspect, it will take a while to build it up. And once you've got to the 2000s, you can access. The second restriction is you can only access it once a year. So, once a year you can go and access and I think there's going to be a lot more work going on or how am I going to access it? What forms do I need to complete? That's far down the line in terms of what's your pension fund and the rules around that. But it's important to note, like you said, don't get excited around I'm going to access immediately etc. A pension fund is a long-term savings. There is no quick fix to “I'm in trouble now. I need to access money now”. That's not how the system is designed. It's designed that over the next 10, 20, 30 years, if we can bring these changes into place, it will mean that people starting work now when they reach retirement will probably be in a much better place financially than people who are retiring now, because of the new regime that has been put into place.
John Manyike 34:37
I saw a couple of media reports, people speculating and saying this new law of the two pot system when it comes to pension will become effective in March 2023, is that true?
Michelle Acton 34:50
I think it's exceptionally optimistic. So, let's just have a think about what the process is, yes. So, we are changing a whole pension fund system in a country. So firstly, there's a huge amount of legislation change that needs to come right. The Income Tax Act needs to change, the Pension Fund Act needs to change, all of those aspects. And that's not something that gets done quickly. So, realistically, even if everybody was full on agreement, and this was ready to roll, I don't think the legislation will be ready until probably early to mid-next year. So, that's just the regulations, then all your pension fund providers, your retirement funds, then have to get ready for this new law, which means system changes, rule changes, you know, all of those elements plus SARS themselves needs to get up to date to make sure that their tax systems and their administration systems can manage these new changes. So, there's quite a bit that needs to happen to make this this happen properly. So, I can't imagine that 2023 is realistic, because I think that it's going to take at least even from when we're ready with the regulations, I think it'll be at least 12 months to get systems up and going. So, I think we're looking at a 2024/2025 implementation of these changes.
John Manyike 36:02
So, in the last budget speech in February 2022, looking at the 2022 financial year, there were some announcements made by Treasury on pension funds effective first of April. What were those changes? What is changing right now?
Michelle Acton 36:20
So, I think there was those changes that happened last year, right. So, last year, we had that whole annuitization change. And that whole convert the pension/provident fund change, I don't know if you remember.
John Manyike 36:31
Please explain that.
Michelle Acton 36:33
So, I remember earlier, I mentioned the fact that if you have, let's say you've had a million Rand saved at retirement, people, especially members of provident funds, would be able to take that whole 1 million Rand in cash. And off they go. Now, we know that also, that's one of the reasons people don't have enough at retirement because they take this, they start a business, the business doesn't work, or they spend it really quickly. And so, they run out of money quite quickly. And so, the law changed last year to say, actually, when you reach retirement, you must actually buy a pension, you can't take it all in cash, you can take a certain cash, but the rest you must use to buy an income. Because otherwise, your water and lights bill, your rents, your food, you can't buy it once-off when you retire and hope it's going to last you forever. So, actually you do need to break your lump sum savings into monthly incomes so that it can align with what your actual expenditure is. And so, that law changed last year, for anyone under 55. So, the over 55s, they can still get all of their money out in cash, but the under 55s, it changed to say actually moving forward, you must buy a pension with your money with at least two thirds of your money in retirement. So, that change has happened. And it's one of many changes because I think it was…sjoe, going back in the history books, 2012 I think it was, where they released papers to say actually, we need to resolve, our retirement fund industry is not working. So, there has been a lot of focus on costs and bringing costs down in funds, there's been a lot of focus on governance and getting the governance light. There's been a lot of focus on consolidation, and then the focus on annuitization, which was last year, and now they're focusing on preservation. So, this is a part of a much bigger plan to ultimately improve retirement outcomes for people in South Africa.
John Manyike 38:15
So, in other words, you know, we used to have what we call a pension fund, a provident fund and the rules of pension funds and provident funds would be just different because they were structured differently, maybe we want to touch on that briefly, and what's the difference? And those changes that you are referring to, which happened in 2021 ,but also the subsequent announcement in 2022 during the budget speech, so what changes there effectively?
Michelle Acton 38:45
Okay, so the whole concept of a provident fund was I save for retirement, same as you do pension. I always believe the simplest way to think of a retirement fund is think of it as a savings account, right. If you open a savings account in your bank, you know, you put money in every month, and that money might earn interest. And then when you finally want it, you access it. Now, the idea is it's just a very, very long-term savings. So, both provident funds and pension funds operated this operate the same way. You put some money in it, goes in tax deductible, which means you haven't paid any tax on it. And it continuously takes, you build it up over time. But that's the same for both pension and provident, the only difference between pension and provident fund was that if you were in a provident fund, and you reached retirement, you could take all of your money out in cash. But in a pension fund, you could only take a third in cash and two thirds, you'd need to annuitize. Now there were previously other differences, but those over time have been moved out. And so, that's been sort of the only difference over the last couple of years. So, this change said, actually, for money going in after a certain date, which was the 1st of March 2021, that money must be also used to be a pension fund. So now realistically, going forward, we only have pension funds, right. So, you’ve got provident fund money, your provident fund money is protected. But actually, part of the process was you will need to buy a pension when you reach retirement, so that that is part of the change now, so it's aligning pension and provident. So, in the big picture going forward, there is very little difference between a pension and provident fund now.
John Manyike 40:16
Okay. So, in conclusion, if you were to speak to employers about preparations they need to make, in anticipation of these new laws, what would that be? And secondly, what would your message be to any worker whether self-employed or employed? What do you say people should do in order to prepare properly for retirement?
Michelle Acton 40:45
Sure. So, the first question you asked me about what would I tell employers, I think the important thing there is to get a message to people not to panic. These changes will take a while to come into play. And because of the whole vested rights and protected, no one's losing anything, there's no money going. I mean, I remember, I think it was 2016 when changes were coming through, and there was a whole lot of concerns around the fact that, sure, these changes are going to come in and government is going to take my money, I must cash out now, must resign now, I must take my money, etc, there's absolutely no need to panic. There will be quite a couple of changes, but most of the changes are not really going to implement impact the employer, it's actually the fund, so the retirement funds will need to do all the work around making sure these changes, but there will be a lot of member communication coming out, etc. So, from that aspect, I think there's still - we're still a long way from having it finalized. Look, when I say a long way, I'm talking 18 months or whatever. So, just make sure you're comfortable. And you understand what this means. That's always the best thing, is get the facts, don't lean on the rumors. For an individual, I think one of the important things to remember, is your retirement fund is your responsibility. No one's going to do it for you. Even if you're part of an employer fund, and you're ticking the box, it's still up to you to take responsibility for it and everybody needs one. So, unless you're one of the very, very few lucky people that win the lotto, or have inheritances that you can live on for the rest of your life, most of us are going to get to an age where we're going to need to live on our savings. And so, that becomes each of our own responsibilities. Don't be afraid to ask for help. But really, it's something that it's never too early to get started with.
John Manyike 42:26
Yeah, interesting. Well, there's a show called “I blew it”. Hopefully one day we'll come up with a concept that says I grew it.
Michelle Acton 42:34
That's it. I love it.
John Manyike 42:36
Michelle, thank you so much. I think we've learned a lot, and until next time.
Michelle Acton 42:39
Thanks, John. It's been great.
John Manyike 42:41
Thank you.