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Tuesday, July 23, 2024

Helping you better understand the new two-pot retirement system

South Africa’s new ‘two-pot’ retirement system was signed into law by President Cyril Ramaphosa on the 1st of June 2024. According to a statement by the Presidency, the Revenue Laws Amendment Bill of 2023, which established a ‘two-pot’ system gives members access to retirement savings without having to resign or cash out their entire pension funds. It also confirms the effective date of 1 September 2024. The intent of the new retirement regime is to address the concerns related to lack of preservation before retirement and lack of access to retirement funds by households in financial distress.

“The much talked about two-pot retirement system, which is scheduled to be implemented on the 1st of September 2024, will have a significant impact on your retirement investments. The two-pot system gives South Africans access to some of their retirement savings in the case of emergencies while ensuring that they still save the majority left in their pension or retirement fund. The COVID-19 pandemic highlighted the need for people to access a portion of their savings or investments due to the impact of job and income losses. Consider this scenario – you lose your job and as a result you and your family are going to lose your home because you cannot afford to pay your rent or your bond – the money in your savings pot could save your family from becoming homeless and buy you some time to find another job,” says Ester Ochse, Product Head at FNB Integrated Advice.

Samukelo Zwane, Head of Product at FNB Wealth and Investments adds, “The two-pot system’s implementation is a big improvement for South Africa’s retirement regulations and will aid in striking a healthy balance between access to retirement savings and preservation. Currently, most members of retirement funds choose to access and spend part or all their funds rather than preserve their retirement savings when they change jobs. This has been a major contributing factor to people not being able to retire comfortably when the time comes.”

Ochse and Zwane unpack some of the key questions that will help South Africans know more and better understand the new two-pot retirement system that has been signed into law:

What is the Two-Pot System?

The two-pot system is basically a divided retirement savings into three pots:  ‘vested’ pot, ‘retirement’ pot and your ‘savings’ pot. From the 1st of September 2024 your retirement savings will be treated in the following manner:

  • Everything you have already saved will be classified as vested and will sit in a vested pot. The existing scheme rules will continue to apply on the vested pot. 
  • Two thirds of all future contributions will go into your retirement pot and cannot be accessed until the day you retire.
  • One third of future contributions will go into your savings pot which you can access in an emergency, but only once each tax year (1 March to 28/29 February).

The above is subject to some exemptions and applicable tax rules.

What happens on 1 September 2024?

10% of your existing retirement fund will be transferred to the savings pot, with a maximum cap of R30,000. For future contributions, one third goes to savings and two thirds to retirement. For example, if you contribute R1200.00 each month to retirement, from 1 September, R800.00 will go into your retirement pot and R400.00 will go into your savings pot.

When can I use the money in my savings pot?

Access to the savings pot is permitted once per tax year (1 March to end February), with a minimum withdrawal of R2,000, taxed in line with your marginal tax rate which will be determined by SARS.

What happens if I resign or lose my job?

Funds in the savings pot can be accessed again in the same tax year if you resign or are retrenched and cease to be a member of the fund as a result. Remember, that any money in your vested pot is still subject to the old rules. You cannot touch your retirement pot until retirement.

What happens to my savings pot at retirement?

At retirement, you can decide to take some or all of the money in your savings pot as a single lumpsum payment subject to applicable tax, or choose to use those funds to purchase an annuity as with the retirement pot.

How will the withdrawal affect my future?

Saving for retirement is important and when you take money out of your retirement savings, it can slow down this growth. It might feel like a small amount of money that you are withdrawing now, but it could make a big difference to the amount in your retirement fund at your retirement date. It will also limit your available lumpsum value at retirement. So, it’s best to only take money out if it’s an emergency and you have no other options.

Why are people who were provident fund members and over 55 on the 1st of March 2021 exempt from the new rules?

There are very complicated rules applicable to these members that can exempt them from participating in the two-pot system. One of the main factors considers that fact that these members are close to retirement, the introduction of the new rules might negatively impact their retirement planning as well as ensuring that their old provident fund benefits remain protected.

“As a leading provider of integrated financial and lifestyle services, we strongly advice South Africans to consult with a financial advisor so they can make a well-informed decision on whether it would be appropriate to withdraw their savings pot. We also want to emphasise that the accessed retirement funds should not be used for instant gratification pleasures such as going for a holiday or buying a luxury item,” concludes Ochse.

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