Navigating the Two-Pot Retirement System

Understanding the Two-Pot System

Although widely known as the Two-pot system, investors will have three pots as retirement contributions will be split into three components:

1. a vested pot.
2. a savings pot, and
3. a retirement pot.

This structure aims to balance the need for long-term retirement security with the flexibility to address the need for accessibility as well as the short-term financial needs of South Africans.

Let’s unpack the “three” pots:

The vested pot only applies if you started saving for retirement before 31 August 2024. The investor’s accumulated savings as at 31 August will be transferred into a vested pot. (As outlined below, this amount will be less 10%, and capped at R30 000, which will be seeded into the investor’s new savings pot on 1 September).

Vested component:

• Investors’ current rights will remain protected. Members of preservation funds who have not accessed their once-off withdrawals under the existing legislation will still be permitted to do so in future.
• Members can take up to one-third of the balance in the vested component as a lump sum and use the remainder to purchase a compulsory annuity.
• Any lump sums received on retirement are taxed according to the retirement lump-sum table.
• The vested provident fund benefits rules that apply will continue to apply, including benefits accrued before the implementation date. Members can access these funds under certain conditions, such as resignation or retirement.

The two pots going forward, will be:

 Savings component:

• This component includes seed capital from the vested component (explained below).
• This pot will initially be filled with 10% of the investor’s fund value on 31 August 31 2024, but capped at R30,000.
• From 1 September one-third of the investor’s contributions going forward will be invested towards the savings pot and, members will be able to withdraw amounts before retiring from the specific retirement fund.
• Pre-retirement withdrawals are limited to once per assessment year, with a minimum withdrawal of R2,000, and no maximum limit.
• These withdrawals are subject to administrative fees from the fund administrator.
• The amount withdrawn will be taxed at the member’s marginal income tax rate.
• If investors decide not to withdraw any funds from their savings pot, this will be paid out as a lump sum at retirement and taxed according to the retirement lump sum tax table.

 Retirement component:

• From 1 September, two-thirds of your contributions will be invested towards the Retirement Pot.
• This pot will preserve all future contributions until retirement and cannot be accessed earlier.
• The retirement pot benefits are taxed according to retirement lump-sum tax tables upon retirement.

Note: Pensioners and provident fund members aged 55 and over on 1 March 2021 are not automatically included in the two-pot system, but they can choose to join if they want to.

Key considerations

 The new Two-Pot System will further emphasise the value and need for sound financial advice. Investors are encouraged to seek financial advice before making big decisions and large withdrawals.

• The amount you request/withdraw, is not necessarily what you will get out: The amount an investor requests to withdraw from their savings pot will be subject to a fee charged by the fund administrator and the investor’s marginal tax rates. Additionally, should money be owed to SARS, the amount owed will first be recouped by SARS before the investor receives their final amount.
• Recognise the true cost of the amount you withdraw today: Investors must consider the long-term consequences of early withdrawals and the importance of preserving retirement savings. Rather ask yourself if you would withdraw the amount today if you knew what it could be worth in 20 years time.

For example: If you have R1,000 and invest it at 10% per year for 20 years, its value after 20 years is R6,727.

Would you withdraw R1000 today, if you knew its true value is R6,727 (…in 20 years)?

• Tax implications: As the saying goes – nothing is certain except for death and taxes. Although fairly straightforward, how your money is taxed should be a consideration:
  • When withdrawing from your savings pot (pre-retirement) this amount will be added to your income for the year, and you will pay tax in line with your marginal tax rate bracket. Also consider that a large withdrawal might impact which tax bracket you fall into, leading to increased taxation.
  • Upon retirement investors will pay tax according to the retirement withdrawal tax tables.
  • When you cash out your savings pot at retirement, retirement lump sum tax tables will apply.
  • Income received from annuities in retirement is taxed in your marginal tax bracket.
• Make healthy financial decisions today, for your future self: Today, the average human lifespan has increased significantly due to advancements in healthcare and improved living conditions. While this is undoubtedly a positive development, it also poses unique challenges, particularly regarding financial planning and retirement savings. As individuals now need their assets to last longer, there is an increasing emphasis on the importance of saving early and growing assets throughout one’s working years. After all, money can only be invested if it is saved. Investors can only realise the power of compound interest if there is an amount that can be compounded.

We cannot ignore South Africa’s economic climate and the financial hardship many citizens face for various reasons. The new to-pot system will assist with accessibility to finances that may alleviate financial pressure for a lot of South African households.

In the same vein, South Africa also has a weak savings culture. Investors are encouraged not to fall prey to the temptation of instant gratification and use retirement savings to purchase items that they could either live without or simply save for and purchase at a later stage.

Regardless of what’s potting, South Africans should make saving for retirement a priority

With longer lifespans, retirees face a greater risk of inflation eating away at their savings. By saving early and consistently growing assets, individuals can better protect themselves.

Starting to save early in life is not just about setting aside money; it’s about cultivating healthy long-term saving habits and thereby securing a healthy financial future.

The power of compound interest means that even modest, consistent contributions can grow into substantial savings over time. By taking proactive steps today – whether it is opening a savings account, exploring investment opportunities, or seeking financial advice – you pave the way towards financial independence. Remember, every small step today contributes to a more secure and prosperous tomorrow.

The Two-Pot Retirement System represents a significant shift in the South African retirement landscape. Financial advisors will play a crucial role in educating and guiding investors through these changes, ensuring they can make informed decisions that secure their financial future. Investors are encouraged to seek financial advice when making decisions regarding possible withdrawals.