SA’s new retirement system – the p(l)ot thickens

The introduction of the new two-pot retirement system has been a subject of debate in the retirement industry for some time. The official starting date has been amended a few times but as things stand currently it seems it will “spring” into action on 1 September 2024.

Many people believe that the main consequence of the new system is that they will now have access to their retirement savings before retirement. This idea goes against the purpose of retirement funds, that they should help us save specifically for retirement. On the contrary, this new reform may just help to save ourselves from ourselves.

Currently, the rules are that should you resign from employment, whether your savings have accumulated in your employer pension or provident fund, you are allowed to withdraw up to 100% of the value of the fund upon resignation. This resulted in many people opting to resign from employment to access their retirement savings when financial trouble came knocking. Bear in mind that retirement funds are mostly inaccessible until retirement, resignation, or emigration.

The new two-pot retirement system strives to help South Africans manage financial stability, provide flexibility, and address some of the past challenges mentioned above. The system aims to balance immediate financial needs with long-term financial security, offering flexibility while safeguarding retirement savings.

Let’s have a closer look at how the new retirement system will work.

Your retirement contributions in future will be divided into different pots, compared with just the one previously.

For retirement savings post 1 September 2024:

The two-pot retirement system will apply to these savings. Why is it referred to as “two-pot”? It’s because your retirement contributions after 1 September will be allocated to two pots and certain rules will apply to each of these pots. Essentially, you will have:

1. A savings pot:  this will hold one-third of your retirement contribution.
2. A retirement pot: this will hold two-thirds of your retirement contribution.

But, what about your retirement savings before 1 September? The value of your accumulated retirement savings up to 31 August will be ringfenced. This will be referred to as your vested pot.

All the rules that currently apply to pre-retirement funds will remain applicable to contributions in the Vested Pot. Have a look at this article written in 2023 that explains the current rules applicable.

As you can see, the plot, or rather, the “pot” thickens.

What are the rules associated with the two-pot system that will apply to my retirement contributions post-1 September?

Savings pot:

• Seed capital of the savings pot: note that there will be a once-off compulsory transfer of 10% of your retirement savings from the vested pot to the savings pot on 31 August (capped at R30,000). The rest of the money will remain in your vested component.
• On top of the seed capital, one-third of your retirement contributions after 1 September 2024 will be transferred into the savings pot.
• You will have immediate access to the savings pot. You can make a minimum withdrawal of R2,000 from the savings pot, with no maximum limit. Withdrawals are permitted once per tax year, between 1 March and 28 February, and are taxable based on your marginal income tax rate.
• Upon retirement, should you want to access a full or partial withdrawal from the savings pot, the lump sum withdrawal will be taxed according to the retirement, death, and severance benefit tax table ( the RDS tax table). These tax rates are generally lower than the marginal income Tax rates applied to withdrawals before retirement. On that note:
  • Bear in mind that the first R550,000 as per the RDS tax table is tax-free.
  • Withdrawals from the savings pot prior to retirement attract income tax and therefore do not “eat” into the R550,000 tax-free portion of the RDS Tax Table.

Retirement pot:

• In the future, two-thirds of your retirement contributions after 1 September will be transferred into the Retirement Pot and are reserved for retirement, ensuring financial security.
• You will not be able to access the funds in the Retirement Pot until retirement, whereupon the full Retirement Pot needs to be used to purchase an annuity.
• The one exception to the rule is that if you emigrate from South Africa, you will be able to access the Retirement Pot (and any funds remaining in the Savings Pot) as a lump sum after you can prove that you have been a non-South African tax resident for three years. Tax will be levied upon the lump sum withdrawal according to the Retirement Lump sum Withdrawal Tax Table unless in terms of a double taxation agreement with the country of new residence, South Africa loses the taxing rights.

Is anyone excluded from the two-pot retirement system?

The two-pot retirement system applies to all pre-retirement funds, including the Government Employees Pension Fund (GEPF), other defined benefit funds and public sector funds, but excludes legacy retirement annuity funds upon application.

Regarding the GEPF, the calculation methods for the GEPF's two pots may vary due to its defined benefit nature. Contributions to the savings and retirement pots may be allocated based on the member's pensionable service.

Provident fund members who were aged 55 and over on 1 March 2021 will not be included in the two-pot system by default but can elect to participate should they wish to.

Final legislation:

The draft legislation is yet to be promulgated by Parliament. Further changes may still be made to the draft legislation. As spring approaches, keep a lookout for any changes in the upcoming months leading up to 1 September.

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