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Retirement
The Two-Pot Retirement System
30 July 2024
What you need to know about your retirement savings and future financial security
- The Two-Pot retirement system is a reform that allows retirement fund members to make partial withdrawals from their retirement funds before retirement while preserving a portion that can only be accessed at retirement to help improve retirement outcomes. This means members need not resign to access part of their retirement benefit if they are in financial distress. This reform will come into effect on 1 September 2024. The drivers behind this reform stemmed from the Covid-19 period. Treasury introduced the Two-Pot system to assist people facing a financial crisis.
- According to Derek Pillay, retirement funds Principal Consultant at Aon South Africa, it is essentially a two-pronged approach where you save for retirement and save for emergencies. Monthly contributions, less admin charges and any risk premiums will be allocated two-thirds into the retirement pot and one-third into the savings pot. It signifies a fundamental shift in the retirement funds industry that affects pension, provident and retirement annuities.
Read Article: Safeguard Your Golden Nest Egg
The Two-Pot system was signed into law on 2 June 2024 with an implementation date of 1 September 2024, at which point retirement savings will be structured as follows:
- Vested pot (Vested and non-vested benefits - protected rights) - When you leave your employer, you can opt to stay as a paid-up member of your current fund, take your money in cash or transfer the money to another fund.
- Retirement pot – You can’t withdraw any money when you leave your employer. This money must remain invested until your retirement and you must buy a pension when you retire.
- Savings pot - You can withdraw for emergencies a minimum of R2000 before fees and taxes, once in a tax year without leaving your employer, and you can also withdraw when you resign or retire.
How will it work?
If you have R250 000 in your retirement savings for example on 31 August 2024 with a monthly net retirement contribution of R1 200:
- Vested pot: R25 000 (10% of R250 000) will be transferred to your savings pot. The remaining retirement savings will be R225 000 with no further contributions going to your vested pot and it will continue to grow.
- Savings pot: R25 000 transferred from the vested component plus R400 (1/3) of your contributions will go into your savings pot every month.
- Retirement pot: R800 of your contributions (2/3) will go to your retirement pot every month.
- “At retirement, you can take the money from the vested pot in cash (the vested part that’s allowed) and/or purchase an income annuity. You can also take the funds in the savings pot or purchase an income annuity with it. The retirement pot is off limits until retirement and needs to be invested in an income annuity unless the combined amount in your retirement component and two-thirds of your vested component (non-vested right) is R165 000 or less. Only then can you take all the money in cash,” explains Derek.
From an existing legislative perspective (Tax rules effective from 1 March 2021), members of retirement vehicles - irrespective of whether the vehicle in question is a pension fund, provident fund or retirement annuity - will be subject to similar rules regarding access to cash on retirement. Members of all retirement funds will only be able to take one-third of the total value of their retirement fund by way of a lump sum at retirement with the balance being taken as an annuity. If the total retirement value does not exceed R247,500, then the full amount may be taken in cash. Restrictions only apply to amounts contributed to provident funds on or after 1 March 2021 and do not apply to members who were 55 and over at the time and still in the same fund.
Provident fund members 55 years or older on 1 March 2021 and still in the same provident fund, will be automatically excluded from the Two-Pot system, unless they opt in. These members will have 12 months to decide from 1 September 2024 and any decision to opt in will be irreversible.
“If the member should die, the beneficiaries will become entitled to the money in all the pots (vested, savings and retirement) at which point they can choose to take the benefit as a lump sum, a pension or a combination of the two. Any money received will be taxed in terms of the retirement lump sum tax table. Pension payments will also be taxed as income in the hands of beneficiaries,” Derek explains.
Be cautious in accessing your savings pot each tax year
“Accessing your savings pot will negatively impact your retirement outcome if your savings monies are eroded. The purpose of this system is to allow members access to monies for emergency purposes ONLY. Remember that you will pay tax at your marginal rate should you access any monies in addition to administration costs for any early access to monies. It is pertinent to seek financial assistance when considering accessing your retirement savings pot,” Derek advises.
- “Current statistics show that a staggering 94% of South Africans will not be able to retire financially independent, leaving many retirees dependent on their family or their state pension and in a position where they need to continue working well past retirement age. To make matters worse, Inflation is eroding the purchasing power of your money, meaning that even if you thought you had enough money saved up, chances are that it may not be enough to keep up with current inflation rates,” Derek adds.
“Any money that you take from your savings pot is borrowing from your future self and financial security. People are living longer and the cost of living is continuously rising. This means that one should make extra provision for retirement to counter both scenarios, “ says Derek.
“Always get the insights and advice of a professional broker to guide you to make the best decision for your retirement and to help you invest your money wisely so that your golden nest egg stretches as far as it possibly can. It’s crucial to make better decisions today to ensure that you can enjoy the quality of life you want and need in your golden years,” Derek concludes.