South Africa’s two-pot retirement system, which became effective on September 1, 2024, introduced significant changes to how retirement savings are both managed and accessed. These reforms, which aim to balance the need for long-term retirement preservation with short-term flexibility and accessibility, are far-reaching and, as such, should be fully understood in the context of one’s wealth creation journey.
Under the two-pot system, retirement contributions are divided into three components:
- Vested Component: This includes all retirement savings accumulated before September 1, 2024. These funds remain subject to the rules that were in place before the implementation of the two-pot system.
- Savings Component: Starting from September 1, 2024, one-third of all new retirement contributions will be allocated to this component. It is designed to provide limited access to funds before retirement under specific conditions.
- Retirement Component: The remaining two-thirds of new contributions will be preserved until retirement and must be used to purchase a retirement income product, such as an annuity.
With this in mind, here are several key facts that retirement annuity investors need to know:
- Access to the Savings Component: Investors can make one withdrawal per tax year from the Savings Component, with the minimum withdrawal amount being R2 000. There is no maximum withdrawal limit, but note that each withdrawal is subject to tax at your marginal rate.
- Seeding of the Savings Component: Upon implementation, a once-off transfer of up to 10% from your Vested Component, capped at R30 000, will be moved to the Savings Component, with the aim being for this to provide immediate access to a portion of your current retirement savings.
- Preservation of the Retirement Component: Funds in the Retirement Component remain accessible until retirement, whereafter they must be used to purchase an annuity income. This is designed to ensure that a significant portion of your savings is preserved for your retirement years.
- Treatment of the Vested Component: Those retirement fund rules that were applicable prior to the Two-Pot System remain applicable to the Vested Component. Investors are still able to access these funds upon resignation or retrenchment, subject to tax.
- Tax implications: Withdrawals made from the Savings Component will be taxed at your marginal tax rate. On the other hand, if you choose not to withdraw these funds until formal retirement, you will be taxed according to the retirement lump sum tax table, which may result in a lower tax rate.
- Eligibility and exclusions: The two-pot system applies to all retirement fund members, including pension, provident, and retirement annuity funds, with the exception of provident fund members who were age 55 or older on March 1, 2021, and who remained in the same fund without changing their membership status. Note, however, that provident fund members are able to opt in.
- Administrative considerations: Retirement funds are required to amend their rules and have them approved by the Financial Sector Conduct Authority (FSCA) to implement the two-pot system. Delays in this process may affect the timing of access to the Savings Component.
- Impact on retirement planning: While the Savings Component offers flexibility, investors should know that frequent withdrawals can erode their retirement savings, so it’s advisable to use this component sparingly. Ideally, investors are encouraged to maintain a separate emergency fund to avoid compromising their retirement future.
- Financial advice: Given the complexities of the two-pot system, consulting with a financial advisor can help you navigate the changes and make decisions aligned with your long-term financial objectives.
The two-pot retirement system represents a significant shift in South Africa’s retirement savings landscape by providing limited access to funds before retirement while preserving most of the capital for retirement years. Being a more complex system, retirement investors must understand the rules and implications of this system before making any withdrawal decisions.
* Odendaal is an associate financial planner at Crue Invest.
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