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How will the two-pot system affect me?

IN A NUTSHELL: If all goes according to plan, from 1 September 2024 one third of your retirement contribution will go towards a savings pot you can access yearly, while two thirds will go into a retirement pot that is only accessible once you retire.

A brief history of the two-pot system

The two-pot system is part of the government’s retirement reform programme initiated in 2012. Research found that although many South Africans contribute towards retirement funds, only about ten per cent can maintain the same lifestyle after retirement. The reason? Members tend to withdraw from their retirement savings before retirement because of financial emergencies. Often members quit their jobs to access these savings to pay for outstanding debts.

The two-pot system is an initiative from the government to help South Africans have access to savings in a crisis but still have money left for retirement.

What should I know?

For your diary. The legislation for the proposed two-pot system is still in draft and not law yet, but the implementation date is set for 1 September 2024. 

It’s compulsory. The changes will apply to all retirement funds, including public sector funds such as the Government Employees Pension Fund and the Transnet funds. Certain so-called “legacy” retirement annuities will be exempt as they were not designed to be accessible before retirement. In general, legacy retirement annuities refer to policies – entered before 1 January 2022 – from life insurance companies that have additional features, such as universal life policies with life or lump-sum disability cover.  

Three pots. There will be three pots, namely the vested, savings and retirement pot. All your retirement savings up to 31 August 2024 will go into the vested pot. From 1 September a third will go into the savings pot and two thirds into the retirement pot.

Vested pot. All the retirement savings a member has accumulated before the two-pot system is implemented will stay in the vested pot. All the old rules apply, e.g. you can access funds if you resign from your employment, you can make a one-off withdrawal before retirement, and at retirement one third can be taken as a cash lump sum while two thirds must be used to purchase an annuity.

Savings pot. You can withdraw from your savings pot once per tax year – from a minimum of R2 000 to the full amount. The amount will be added to your other income and taxed at your marginal tax rate. You can also transfer money from the savings pot to the retirement pot tax-free.

Retirement pot. No amounts may be transferred out of this pot until retirement, not even if you resign from your job. On retirement, you must buy an annuity with the entire amount in the retirement pot. The minimum amount that can be used to purchase an annuity is R165 000. Amounts less than the minimum amount in this pot may be withdrawn as a lump sum. The tax rates remain the same, e.g. the first R550 000 is tax-free.

Retrenchment? If you are retrenched, you can withdraw all the funds in your vested and savings pots. Legislation dealing with withdrawals from the retirement pot will be finalised in the second phase of the two-pot system.

Moving money between pots. Transfers (these are tax-free) can be made from the vested to the savings pot and from the savings to the retirement pot, but not vice versa.

Seed capital. “Seed capital” will be transferred from their retirement fund as of 31 August 2024 to the savings pot, which can be accessed immediately on the implementation date. This portion will be calculated as ten per cent of the benefit accumulated up to the 31st, limited to R30 000, whichever is the lesser. Please note – the seed capital will be a one-off and subject to the normal tax rates.

Seed capital: Retirement fund contributions on 31 August x 10% = < R30 000

Thwart tax. You can still claim a tax deduction on these contributions, namely the lesser of R350 000 and 27,5% of remuneration or taxable income.

Your contribution stays the same. Yes, if you paid R1 500 into a retirement every month, from 1 September R500 will go into the savings pot and R1 000 into the retirement pot.

What about Defined-benefit funds (DB funds)? The current proposal is that, from 1 September, DB funds calculate the contribution to the savings pot based on one third of the member’s pensionable service (i.e. number of years), and the contribution to the retirement pot based on two thirds thereof.

Let’s explain:

A member has been in service for two-and-a-half years (30 months) and his retirement contribution is valued at R150 000. The fund seeds his savings pot with R15 000, which is 10% of his benefit. The fund will reduce the member’s pensionable service by 10% to compensate for the withdrawal. The pensionable service date will be moved forward by three months (10% of 30 months) to achieve this.