Essential Two-Pot
Retirement System Updates

Two-Pot System: What You Need To Know

Want to see how much you can withdraw on 1 September 2024?

What is Two Pot System

The Two-Pot Retirement System was implemented by the South African National Treasury to enable retirement fund members to access a small portion of their retirement savings before they retire for emergencies without having to leave their job.

Background of the Two Pot (Why it was implemented)

In general, South Africa has a poor savings culture.

Many South Africans are cash strapped and simply do not have enough money to prioritise emergency savings. In 2021, partly as a result of South Africans suffering financially during the economic downturn brought on by the Covid-19 pandemic, National Treasury proposed changing the current retirement savings system to a "two-pot" system, to allow members to access up to a third of their retirement funds in an emergency.

This proposal, where members will be able to access contributions from one pot, with contributions to the other pot not accessible until their retirement, is part of government's broader retirement reforms aimed at encouraging employees to adequately save for retirement. In the latest draft released in July 2023, the regulation now refers to the "pots" as "components". However for better understanding we will use “pots” in this newsletter.

How it will work

From 1 September 2024, all your current accumulated retirement savings will be moved to a pot called the "VESTED POT". All contributions made after 1 September 2024 will be split into two pots namely:

From the vested pot, 10% of your total savings, capped at R30 000 will be transferred to the savings pot. You can withdraw this amount from 1 September 2024. The minimum withdrawal amount is R2000.00.

Below infographic provides a better understanding on how your contributions will be split.

Who qualifies for it

Any South African who has a pension fund, provident fund, retirement annuity, or a preservation fund.

On 1 September 2024, provident fund members who were 55 years or older on 1 March 2021 can choose to:

Contribute to the vested pot (until they retire or leave the fund) or participate in the two-pot system and split all new contributions between savings and retirement pots.

What is the impact of withdrawing funds

Accessing some of your retirement savings at any time prior to retirement may have a far bigger impact than you realise. If you are young, you may think that you will have plenty of time to save the amount that you have withdrawn, but not preserving that investment will cost you more than you may think as you will miss out on the power of compounding (capability of an investment to generate earnings, not only on the principal amount, by also on the interest earned over time).

It is important to note that "It's not 'use it or lose it' system". You will not "forfeit" the amount in your savings pots if you do not make a withdrawal once a year. Money that is not withdrawn in a year, along with further contributions, will accumulate in the savings pot. Pre-retirement withdrawals from the savings pot may seem essential or inconsequential at the time, but members need to consider the long-term implications. Withdrawals from the savings pot will reduce the cash lump sum available at retirement.

What to consider before withdrawing from the savings pot

Tax Implications: Under the current system, pre-retirement withdrawals are subject to the tax rates Although these rates are more punitive than the rates that apply at retirement, the first R27 500 is tax-free.

Under two pots, money withdrawn from the savings pot will be added to a member's income and taxed at their marginal rate. A consideration of the tax implications of these withdrawals includes whether they will push the member into a higher tax bracket. The fund’s administrator, SALT Employee Benefits will deduct the tax and pay it over to the South African Revenue Service. As a member you will receive the after-tax amount.

Withdrawals won't be free: Members can expect to pay administration fees for processing withdrawals. Administrators will probably communicate these fees closer to the implementation date.

It is therefore encouraged that the savings pot is to be used as a safety net rather than a primary source of income. Savings should be reserved for genuine emergencies rather than day-to-day expenses.

Your dream to retire comfortable.

According to the South African Treasury, only 6 out of every 100 South Africans will be able to retire comfortably. This is a very disturbing and concerning reality which shows that the majority of South Africans may struggle to make ends meet financially when they reach their retirement phase. Given that people are living longer, it is imperative that retirement savings are strictly left to be used during retirement.

Everyone wants to retire comfortably, but getting there is not an isolated, once-off decision. Rather, a combination of healthy habits learnt and practiced throughout a lifetime. Members can achieve their dream to retire comfortable by investing for longer and withdrawing wisely (only when extremely necessary).

Disclaimer: The implementation date will depend on the final legislation

Frequently Asked Questions

Is the new legislation effected yet?

The new legislation is still in draft format and not law yet. The aim is to have it in place by 1 September 2024.

Which members are affected by the two-pot system?

The two-pot system changes affect every retirement fund member, but we expect members of provident funds who were 55 years or older on 1 March 2021 to be automatically excluded from the changes. These members can choose to participate in the two-pot system.

What is 'Seed Capital', and what does this mean for the starting value in the Savings Component?

Seed Capital is a portion of a member's accumulated retirement savings as at 31 August 2024. The "Seed Capital" will be transferred once-off into the member's Savings Component on 1 September 2024. This will serve as a starting balance to the Savings Component. Seed Capital is proposed to be calculated as 10% of the accumulated retirement savings as at 31 August 2024, capped at R30 000.

What happens to the retirement savings I had before the two-pot change?

The old rules of your fund will apply to:

Any money you've already saved before 1 September 2024.
Any increase in value from investing these savings until you retire.

What are the old rules that will still apply?

Every retirement fund has rules that relate to:

How much you can withdraw in cash when you leave your employer and when you retire.
How much of your retirement savings you must use to get a retirement income one day.

These rules mostly depend on the type of retirement fund you're in such as a pension fund, provident fund or retirement annuity fund.

Will any of my vested pot be affected?

Yes. Some of your vested pot (your savings up to 31 August 2024) will automatically be moved to your savings pot on 1 September 2024. The amount that will be moved to your savings pot is expected to be 10% of your vested pot. This first amount in your savings pot can't be more than R30 000. If you have R2 000 or more in your savings pot on 1 September 2024, you will be allowed to withdraw it if you need to. It's always better to save your savings pot for your future self if you can.

What rules will apply to any cash withdrawals I make from my savings pot?

Your savings pot is meant for your retirement, but you can withdraw cash from it once a year in case of emergency. Any amounts you withdraw will be taxable. National Treasury is still finalising the rules that apply to cash withdrawals. Here are the rules that we think will apply, but some may change:

You can only make one withdrawal in a tax year (from the beginning of March to the end of February the next year). People who leave their jobs may be allowed to make a second withdrawal, but this still needs to be confirmed.
You can only withdraw cash if you have more than R2 000 in your savings pot on 1 September 2024.
SARS will deduct tax from any amount that you withdraw at the highest rate that applies to you.

It is important to know that any amounts you withdraw from your savings pot before retirement will affect your retirement by:

Decreasing the amount of cash that you have available when you retire.
Decreasing your retirement income.

Do the changes apply to retirement annuity funds and preservation funds?

Yes, the changes apply to all retirement funds.

What is the process I need to follow to withdraw from my savings pot?

Once the rules have been finalised, we will develop processes for members to follow. We will let members know how to start their withdrawal and how to provide any supporting documents we need from members to process a withdrawal.

Which transfers between components will be allowed?

Within the same fund (intra-fund transfers):

From a Vested Component to a Retirement Component.
From a Savings Component to Retirement Component.

If l am retrenched, what savings will l be able to access?

For pension funds and provident funds, you will be able to access all the savings in your vested component as well as your accumulated savings in the savings component.
For retirement annuities, you will only be able to access your savings component.

Disclaimer: The implementation date will depend on the final legislation