Old Mutual readies for high pension savings cash-outs as two-pot day nears

Old Mutual’s fund management arm, Old Mutual Investment Group, has said internal data and insights point to a looming influx of withdrawal claims from clients who are likely to cash out their savings when the two-pot retirement system officially kicks in March next year.

Last month, the government published proposed legislation that outlines how the new two-pot retirement system, which will take effect on 1 March 2024, will be regulated.

Listen/read: New regulations for the two-pot pension system and how you’ll be impacted

From the effective date, retirement fund contributions will be spread across two pots – with one third transferred into a savings pot that can be dipped into once a year, and the remainder in a retirement pot that remains inaccessible.

Big jump in withdrawals expected

On day one of the new system, Old Mutual Investment Group anticipates that 350 000 of the clients in its 600 000-member occupational employer-employee feeder fund will be eligible to claim for withdrawal. This is according to Michelle Acton, retirement reform executive at Old Mutual, who was speaking on Tuesday.

That would be a staggering jump from the 60 000 to 70 000 claims currently processed each year.

As much as 10% of a member’s funds, capped at R25 000, will be transferred into the savings pot.

No maximum withdrawal amount is set, and if choosing to make a withdrawal, the member cannot draw less than R2 000.

Who is likely to be lining up?

Acton said high-level testing that involved quizzing members on whether they would be accessing their savings or not, returned responses linked to income levels, and how far or close they are to retiring.

Those on the eve of their retirement showed a lower probability of making a withdrawal, as did high income earner clients.

The latter are discouraged by the marginal tax rate they would accrue upon claiming.

“We are seeing that a very high proportion of our lower and middle-income individuals that have said they would definitely come and withdraw their assets,” said Acton. 

“We do anticipate quite a high proportion of those 350 000 members trying to in some way, through the month of March [into] April, claim their benefits.”

Administrative costs shouldn’t be ‘cross-subsidised’

She cautioned that members will have to bear the additional administrative costs related to processing the claims, saying that as the industry races to ready itself for 1 March 2024, it has had to equip itself with capabilities it never had to consider before the new rules. 

“In this new world, what’s being proposed is saying that ‘Actually the amount of admin that is involved in processing these savings pot withdrawal benefits is a lot’,” she said.

“Retirement funds now need to enable transactional capabilities that they’ve never had to enable before.”

She said it must be ensured that the underlying administrative costs are fair and don’t affect  members who elect to leave their savings untouched.

“You don’t want to have any cross-subsidies of those who are remaining in the fund and not withdrawing to those who are consistently withdrawing,” she said. 

“The logic is saying that ‘Actually the cost of that transactional capability that needs to be built must be carried by those members who are going to action that transactional capability’.”

Read: Ten top tips on the two-pot system for retirement savings