The Two-Pot Retirement System
The Two-Pot Retirement system is designed to provide South Africans with a balanced approach to financial management, offering both stability and flexibility in their golden years. By allowing controlled withdrawals for unforeseen expenses, this system safeguards the majority of retirement funds while still accommodating emergency needs.
The Two-Pot Retirement System’s rules will only apply to your future retirement contributions, starting on the effective date of 1 September 2024.
The Vested Pot component is made up of your retirement savings up to 31 August 2024
Vested Pot Backstory:
1) Provident Fund Before March 2021 At Retirement OR Resignation:
– The individual could withdraw 100% in cash
– Transfer into a Preservation Fund any percentage
– Withdraw cash at any percentage
2) After March 2021:
Money in the Provident Fund before 1 March 2021 is called the Vested Fund
3) Money you accumulated from 1 March 2021:
At retirement:
– You are only allowed to withdraw 1/3 cash (subjected to tax)
– The remaining 2/3 will be annuitized (to convert an amount of money, such as an accumulation of retirement savings to an annuity).
– If your funds are below R 247 500.00 you can withdraw fully amount in cash.
At Resignation OR Retrenchment:
– You can withdraw 100% in cash (subject to tax) or any percentage
– Preserve any percentage
Vested Pot
After the implementation date of 21 September, you will have the same rights of access to your benefits in the Vested Component, as you did before. You consequently have vested rights of access, which will include all existing rights relating to their accumulated Vested and Non-Vested benefits.
10% of this Vested Pot (not exceeding R 30 000) will be transferred (Seeded) to the Savings Pot implemented on 21 September 2024.
All retirement contributions from 1 Sept 2024 onwards will no longer go into the Vested Pot as it did in the past, as it will be split up:
– 1/3 will be allocated to the Savings Pot
– 2/3 will be allocated to the Retirement Pot
The Vested component, plus future growth thereon, will not be impacted by two-pot. You will not be able to make further contributions to this component but you are able to move the funds in your Vested Pot to Your Retirement Pot. (This decision needs to be made before 1 September 2025 and it is a once-off decision).
Fund rules will continue to apply to your Vested Pot regarding Resignation, Retrenchment and Retirement.
No contributions will go into this pot anymore, but your Vested pot will continue to grow with investment returns.
Savings Pot
The Savings Pot was created on 1 September 2024 with an initial once-off pot balance.
– This Savings Pot balance is seeded from your Vested Pot at 10% of your Vested total but capped at R 30 000.
– You can withdraw any amount between R 2 000 and R 30 000.
– For each year of service you have after 1 September 2024, four months will be allocated to the savings pot and eight months to the retirement pot
– Your withdrawal limit will remain at R 30 000, regardless of your Savings Pot Balance
– You can withdraw from the Savings Pot once every tax year (between 1 March and 28 February)
– Resignation & Retrenchment: May be taken in cash lump sum (subject to tax), transferred to a new fund or preserved.
– Any benefits left in the Savings Component at retirement can be taken as a cash lump sum retirement benefit. These benefits may also be transferred to the Retirement Component at retirement and taken in the form of a compulsory annuity.
The Retirement Pot
This Retirement Pot is designed for long-term savings and is strictly preserved for retirement. The Retirement Pot receives 2/3 of retirement contribution from 1 September 2024 onwards.
Withdrawals are only permitted under the following circumstances:
- Retirement
- Death
- Emigration (if you’ve formally left South Africa and ceased tax residency for at least 3 years)
- Non-resident status (if your SA work or visitor’s visa has expired)
At retirement, 100% of the Retirement Component benefits must be taken as a compulsory annuity, providing a guaranteed income stream.
Contributions in excess of the tax-deductible amount, will also be split one-third to the savings pot and two-thirds to the retirement pot.
Retirement Annuity at Resignation:
– Only allowed to cash in if money/fund value is below R 15 000
– If the total amount of your vested and retirement components is less than R165 000, you may withdraw the full amount.
If value is above R 15 000 you are not allowed to touch it until retirement and the following applies:
– 1/3 is cash payable
– 2/3 is annuitized
– This Savings Pot balance is seeded from your Vested Pot at 10% of your Vested total but capped at R 30 000.
– You can withdraw any amount between R 2 000 and R 30 000.
– For each year of service you have after 1 September 2024, four months will be allocated to the savings pot and eight months to the retirement pot
– Your withdrawal limit will remain at R 30 000, regardless of your Savings Pot Balance
– You can withdraw from the Savings Pot once every tax year (between 1 March and 28 February)
– Resignation & Retrenchment: May be taken in cash lump sum (subject to tax), transferred to a new fund or preserved.
– Any benefits left in the Savings Component at retirement can be taken as a cash lump sum retirement benefit. These benefits may also be transferred to the Retirement Component at retirement and taken in the form of a compulsory annuity.
The Retirement Pot
This Retirement Pot is designed for long-term savings and is strictly preserved for retirement. The Retirement Pot receives 2/3 of retirement contribution from 1 September 2024 onwards.
Withdrawals are only permitted under the following circumstances:
- Retirement
- Death
- Emigration (if you’ve formally left South Africa and ceased tax residency for at least 3 years)
- Non-resident status (if your SA work or visitor’s visa has expired)
At retirement, 100% of the Retirement Component benefits must be taken as a compulsory annuity, providing a guaranteed income stream.
Contributions in excess of the tax-deductible amount, will also be split one-third to the savings pot and two-thirds to the retirement pot.
Retirement Annuity at Resignation:
– Only allowed to cash in if money/fund value is below R 15 000
– If the total amount of your vested and retirement components is less than R165 000, you may withdraw the full amount.
If value is above R 15 000 you are not allowed to touch it until retirement and the following applies:
– 1/3 is cash payable
– 2/3 is annuitized
The seed capital is the amount that will be transferred from the vested pot to the savings pot on 1 September 2024 as an opening balance.
SEEDING EXAMPLE 1
If you have R500 000 in your retirement fund on 31 August 2024.
10 percent of this amounts to R50 000.
However, a maximum of R30 000 only can be transferred into your savings pot on 1 September 2024.
You will be able to withdraw any amount between R2 000 and R30 000 after 1 September 2024.
SEEDING EXAMPLE 2:
If you have R10 000 in your retirement fund on 31 August 2024.
10 percent of this amounts to R1 000.
As this is less than the maximum of R30 000, this amount will be transferred to your savings pot.
However, R1 000 is less than the R2 000 minimum you are allowed to withdraw, so you will not be able to withdraw immediately.
You will have to wait until you have contributed another R3 000 to your fund.
One third of anything you contribute after 1 September 2024 will be allocated to the savings pot, so R1 000 of the first R3 000 you contribute after this date will be allocated to your savings pot.
This will increase the balance in your savings pot will be R2 000 and then you will be able to take a savings withdrawal benefit from your savings pot.
Visit the following pages to ensure you have a stress-free retirement.
Provident & Retirement Fund page
Investment Products and Asset Classes (invest for your retirement!)
Alternatively, let our AI Financial guru, M.A.L.I calculate how much you need for retirement as well as calculate how you can invest to grow your retirement funds exponentially!
Before tapping into your retirement savings, explore alternative options to ensure you’re making an informed decision. Consider your long-term income needs and reserve withdrawals for genuine emergencies only. Avoid withdrawing for non-essential expenses, as this can significantly reduce your retirement income and incur tax penalties.
If you must withdraw, aim to replenish the withdrawn amount and its potential growth to maintain a sustainable retirement income. Remember, early withdrawals reduce your future retirement lump sum, impacting your ability to cover essential expenses like healthcare and transportation.
Your retirement savings are structured for long-term growth, not everyday transactions. Withdrawals from the Savings Component are irreversible and cannot be directly replenished, meaning you cannot simply just pay back into that pot.
To rebuild your savings, you can:
1. Increase future contributions over time
2. Make one-off voluntary contributions (note: these won’t directly replenish the Savings Pot)
Any voluntary contributions will be allocated as follows:
– 1/3 to the Savings Pot
– 2/3 to the Retirement Pot
This highlights the permanent nature of withdrawals and encourages thoughtful financial planning.
Withdrawals are added to your taxable income and taxed at your marginal tax rate at the time of withdrawal:
1. The withdrawn amount is added to your total income for that year.
2. You’ll pay taxes on that withdrawn amount at the same tax rate as your income.
Think of it like this:
Let’s say you earn R50,000 per year and withdraw R10,000 from retirement savings.
Your total income for that year becomes R60,000 (R50,000 + R10,000).
You’ll pay taxes on the R10,000 withdrawal at the same tax rate applied to your R50,000 income.
This means your tax rate will depend on your income level at the time of withdrawal, not when you originally saved the money.
Two-pot: Enabling better retirements – for those who avoid the risks
Two-pot: Enabling better retirements – for those who avoid the risks
The two-pot retirement system, which is set to be implemented on 1 September 2024, has been designed to improve retirement outcomes for South Africans by ensuring that the majority of their future retirement fund contributions remain invested for their retirement, while allowing some access before retirement in case of emergencies. If used as intended, the new rules can assist retirement fund members in achieving higher and more sustainable incomes in retirement. However, a few missteps, some of which may seem harmless, have the potential to offset a lot of the new rules’ good intentions.
Read the Allan Gray article HERE
Two-pot system: Immediate benefits must be weighed up against long-term security
As of 1 September, South Africa embarked on a significant shift in retirement planning with the introduction of the two-pot retirement system. This new structure allows retirement fund members to access a portion of their savings without the drastic step of resigning from their jobs. On the surface, this change offers flexibility and immediate financial relief for many. But beneath the surface lies a complex web of tax implications and potential long-term consequences that deserve a closer examination.
Read the Mail & Guardian article HERE