Two-pot Retirement System – What do the changes mean for your retirement?

A two-pot system will come into effect on 1 September 2024.

What will happen on 1 September 2024 and how will it affect you?

With effect from 1 September 2024, your retirement fund savings will be divided into three components:

Pot 1: The “vested component”

This “pot” will comprise of a members historic retirement savings accumulated up until 31 August 2024.

This pot will not be affected by the new proposed legislation and will continue to be invested in terms of the fund rules and will only be accessible by the member at the time of their retirement where this pot will be used to purchase an annuity (subject to certain exceptions addressed below).

No withdrawals can be made from this pot while in employment or when you resign from employment.

Pot 2: The “savings component”

This “pot” will be initiated by way of a once off transfer from a members vested pot equal to 10% of the balance of your retirement savings as at 31 August 2024, but the transfer will be limited to a maximum of R30,000.

This transfer of funds will be the “starting balance” of a member’s savings pot which will also grow due to investment returns.

With effect from 1 September 2024, one-third of any future contributions made to a retirement fund will be paid to this pot.

Pot 3: The “retirement component”

With effect from 1 September 2024, two-thirds of any future contributions made to a retirement fund will be used to fund this pot.

No withdrawals will be allowed from this pot that will only become accessible to the member on reaching retirement.

What happens if I need to make a withdrawal?

Should a member find themselves in financial distress or need to withdraw from their savings pot, this will be allowed under the following conditions:

• A member can access this pot at any time should they experience financial hardship.
• Only one withdrawal will be allowed per tax year.
• When making a withdrawal, a minimum withdrawal amount (before taking into account any charges or transaction costs) is set at R2,000.
• To the extent that there is a savings balance to be withdrawn, it can be withdrawn by the member.

Is it advisable to withdraw from your savings pot?

Any withdrawal from savings pot will result in the member having less savings at the time of the members retirement.

Any withdrawal made before reaching retirement will not be taxed in terms of the withdrawal tables but as part of the members taxable income in the year of withdrawal, that could be at a marginal rate of up to 45%.

What happens on retirement?

When reaching retirement, a member is able to withdraw no more than one third of the total balance of the accumulated balances in their vested and retirement pots as a single payment. The member will then be required to purchase an annuity with the remaining two-thirds (including a living annuity).

Any available balance in the members savings pot at the date of their retirement will also be able to be withdrawn but will not be taxed at the marginal rate of the member. Rather, withdrawals made from all three pots on retirement will be subject to the retirement lump sum tax tables.

Exceptions for provident fund members:

Prior to 1 March 2021, the tax treatment of provident funds was different to that of retirement annuity funds and pension funds, as a provident fund was not subject to the restriction of being able to only withdrawal a maximum amount of one-third of the accumulated funds as was the case with a pension and retirement annuity.

As a result, members of a provident funds as at 1 March 2021 are treated slightly differently to members of a retirement annuity fund or a pension fund.

Provident fund member under the age of 55 as at 1 March 2021:

To the extent that contributions were made before 1 March 2021, this balance will be excluded from the vested pot and the calculation of the initial capital deposited in the savings pot.

For purposes of the “two-pot system”, on 1 September 2024 the vested component for members of a provident fund or provident preservation fund will be calculated proportionally from the members retirement balance of their funds on 28 February 2021 and the increase in value up until 31 August 2024.

Provident fund members over the age of 55 as at 1 March 2021:

These members’ retirement savings are not automatically part of the two-pot retirement system. 

As these qualifying members are close to retirement, they have the choice to opt in to the two-pot retirement system or not. 

These members will have 12 months from 1 September 2024 to make this choice.

If they do not op in, the old rules with regards to their contributions will apply and they will not have to contribute to both a savings pot and a retirement pot.

Once they have opted in, however, this decision is final and cannot be undone.

How will divorce and maintenance orders be affected?

Allowances have been made for divorce and maintenance orders against a member’s retirement fund, but further clarity is still required before the implementation around which pots are affected and how it will be processed.

What if I emigrate from South Africa?

A member of a retirement fund who can prove to SARS that they have ceased to be a tax resident for at least three consecutive years after 1 March 2021 or who can confirm that they placed their financial emigration on record with the South African Reserve Bank before 28 February 2021 will be able to withdraw the full balance of their retirement pot and vested pot prior to their retirement date.

Such withdrawal from a vesting or retirement component will be subject to tax in terms of the withdrawal lump sum tax table, which are taxed at a higher tax rate than the retirement lump sum tax table that are applied upon retirement.

Any balance withdrawn from the savings component at this time will be taxed in terms of the members’ marginal tax rate at the time of emigration.

The two-pot retirement system is important if administered correctly, as it can help you save more for retirement and make better retirement planning decisions, as it helps protect your retirement component from being accessed too early or lost due to financial hardship.

Should you have any queries with regard to the above, please contact someone in our Private Client team to assist you.

Authors:

Naomie Fourie, Assistant Manager - Tax Consulting 

Sharon MacHutchon,Manager - Tax Consulting