What is a two-pot retirement?
The two-pot retirement system is a reform that will allow retirement fund members to make partial withdrawals from their retirement funds before retirement, while preserving a portion that can only be accessed at retirement to help improve retirement outcomes. This means members need not resign to access part of their retirement benefit if they are in financial distress. This reform will come into effect on 1 September 2024.
Who is it meant for?
The new system will apply to all retirement funds, that is, both private sector and public sector funds, except for the old generation or legacy retirement annuity policies, or funds with no active participating members (such as funds in liquidation, beneficiary funds, closed funds or dormant funds). Pensioners and members of provident funds that were 55 years and older on 1 March 2021 who have not opted to be part of the two-pot system will also be excluded.
Why the two pot system?
This system is meant to support long-term retirement savings while offering flexibility to help fund members in f inancial distress. In many cases, retirement funds are the only savings that fund members have. Under the current system, some members resign to access their retirement fund savings to pay off debt, which is detrimental from an economic, financial planning and retirement provision point of view. The two-pot system is meant to help fund members in times of financial difficulty by allowing access to the savings component before retirement. It is advisable that members use the savings component sparingly and only when there is a dire need. Importantly, the two pot system also protects a portion of savings to only be used for retirement.
How will it work?
The reform creates a "savings component", a "retirement component" and a "vested component". Only the "savings component" and "retirement component" can receive retirement contributions from implementation date onwards. The vested component will house retirement benefits accumulated by the member before the implementation date. Investment growth will still be credited to this component. From 1 September 2024, retirement contributions will be split by your retirement fund into a savings component (or pot) and a retirement component. A ratio of 1/3 (one-third) of total contributions will go into the savings component and 2/3 (two-third) of total contributions into the retirement component.
For example, if person A's retirement contribution in September 2024 is R900 per month, R300 will go to the savings component and R600 into the retirement component. Person A would be able to withdraw any amount from the savings component, the withdrawal should not be less R2 000 and a withdrawal can only be made once in a tax year. One does not need to make a withdrawal from the savings component every tax year. Amounts in the account will still be available for withdrawal in future years and would benefit from tax-free growth within the account until a withdrawal is made.
The savings component will be accessible at any time, but withdrawals must be a minimum of R2 000 and, but only one withdrawal may be made in a tax year. What is withdrawn will be taxed at the individual's marginal tax rate. There is no maximum withdrawal limit on the savings component. The retirement component cannot be accessed on resignation and may only be accessed at retirement. That means it will be preserved until retirement.
Retrenchment cases will be dealt with in another phase of this reform process. The retirement value accumulated as at 31 August 2024, referred to as the "vested component", will not take further contributions but will remain invested by the retirement fund. Should you resign in future, your current right (vested right) to access this component or have it transferred to a preservation fund is maintained. Reference: 2024 Two-Pot System - FAQ.pdf (treasury.gov.za)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.