The New Two-Pot Retirement System

New Retirement System to be implemented

Starting from September 1, 2024, South Africa will implement the much-anticipated new two-pot retirement system, which represents a significant change in South Africa’s retirement landscape, aimed at providing greater financial flexibility to retirement fund members.

This system, encapsulated in the Revenue Laws Amendment Bill, which was signed into law by President Cyril Ramaphosa in June 2024, introduces significant changes to how retirement savings are managed, accessed and aims to help preserve retirement savings while offering controlled access to funds during financial hardship. Withdrawals are taxed and limited to certain conditions to manage debt and financial health.

Overview of the Two-Pot System

The two-pot retirement system is designed to split retirement contributions into two distinct “pots”, however, there are actually three distinct components: the vested component, the retirement component and the savings component.

Vested component

• Existing retirement savings as of August 31, 2024, will be ring-fenced into a “vested pot.” This component includes all retirement savings accumulated up until 31 August 2024, minus an initial once-off allocation to the savings component.

• You can access these funds when you leave your employer or in cases of emigration, disability or death. At retirement, the funds are available as a lump sum or an annuity, depending on the value and the nature of the fund.
• For peace of mind, you could request your retirement fund values before the two-pot implementation date to ensure you are aware of the values in your vested pot.

Retirement component

• Two-thirds of all contributions made from 1 September 2024 onwards will be allocated to this component.

• These funds are locked until retirement when they must be used to purchase a retirement income product unless the amount falls below the prescribed minimum.

• This ensures that a substantial portion of retirement savings remains untouched and grows over time to support members in their retirement years.

Savings component

• One third of contributions from 1 September 2024 will go into this component. It will initially be funded by a once-off allocation from the vested component, up to 10% of its value at 31 August 2024, capped at R30 000.

• You can make one withdrawal per tax year, providing a means to address financial emergencies without having to resign, subject to a minimum amount of R2 000,00. At retirement, this component can be taken as a lump sum or used to buy a retirement income. 

Benefits and Considerations

The primary advantage of the two-pot system is the flexibility it offers as by allowing partial access to savings, the system aims to reduce the financial stress that can lead to premature resignations and provides a safety net in times of economic hardship without compromising long-term retirement goals.

However, caution should be exercised, as frequent withdrawals could undermine the growth potential of your retirement savings, impacting your financial security in later years. One should only withdraw from the savings pot in cases of genuine financial need.

Members of a provident fund who were 55 or older on 1 March 2021 will be excluded from the new system, however these members could choose to opt into the two-pot retirement system.

Tax Implications

You will be entitled to one withdrawal per tax year, which will be taxed as gross income at the marginal rate. Any amount withdrawn from your savings benefit will be taxed at your marginal income tax rate, depending on your taxable income for the tax year, including the withdrawal amount. The new marginal tax rate that will apply to the savings pot is significantly higher than the existing tax rate for early retirement fund withdrawals.

The minimum amount an employee or member may withdraw is R2000. The seed capital will be limited to 10% of the amount in your retirement fund account as of 31 August 2024, with a maximum amount of R30,000. The value of your retirement fund account on 31 August 2024 needs to be at least R300,000, to access a withdrawal benefit of R30,000.

There are additional tax implications that you need to consider, when submitting a claim for a withdrawal from your retirement savings pot. Your fund administrator will request the South African Revenue Service (Sars) to issue a tax directive and this tax directive may be accompanied by an IT 88 (a deduction order allowing Sars to electronically collect outstanding money from taxpayers when it issues a tax directive) if you have outstanding monies owed to Sars.

Practical Implications

The legislative process for the two-pot retirement system is ongoing and the administration systems of all product providers are being updated to ensure a smooth transition. Funds need to ensure that contributions are correctly allocated between the two pots and that withdrawal requests are processed in accordance with the new rules. The Financial Sector Conduct Authority (FSCA) will oversee the implementation to ensure compliance and address any emerging issues.

Conclusion

The introduction of the two-pot retirement system marks a significant shift in South Africa’s retirement savings landscape. Once every year, you will be able to access the entire balance available in your retirement savings, however, you don’t have to exercise this option, as it is not an obligation. You are effectively borrowing money from your future self over a fixed term, which is costly and can reduce your standard of living in retirement.

By balancing immediate financial needs with long-term savings goals, the new system aims to enhance financial resilience among retirement fund members. As the implementation date approaches, it is crucial to understand the new rules and prepare for the changes.