TWO-POT RETIREMENT SYSTEM: WHAT YOU NEED TO KNOW

It’s time to get to grips with South Africa’s new two-pot retirement system – here's everything you need to know about how this affects you.

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Before September, money paid into our retirement schemes was off-limits for the duration of our employment. That law has changed, so that most people now have immediate access to a portion of their retirement savings.

New legislation, sparked to a large extent by the pandemic, means that from 1 September this year, South Africans have a fundamentally different relationship with their retirement savings. Lawmakers, seeking a way to offer a parachute to working people in times of financial distress, have introduced what’s known as the ‘two-pot retirement system’. Basically, as of September, South Africans with pension funds, provident funds, retirement annuities or a preservation fund, have immediate access – albeit limited – to a portion of the cash accumulated by those funds.

WHY TWO POTS?
Your retirement savings funds are now divided into two ‘pots’. There is a strict, untouchable ‘retirement pot’ which comprises two-thirds of your retirement savings and may not be accessed at all before you do, in fact, retire or leave your job. The portion of your retirement savings in this pot is quite literally locked away, the point being to ensure you have the greater part of your retirement money saved up for those years when you will need it most.

The other pot is a ‘savings pot’, which comprises the remaining one-third of your retirement investment and savings, and which is accessible by you in advance of your retirement, albeit with certain caveats put in place to prevent it from being misused. The new system enables you to make one withdrawal from the saving pot in each tax year; withdrawals must be at least R2 000 and are subject to administrative fees and normal income tax.
The two-pot system exists in order to protect the larger portion of your retirement investment while providing some level of flexibility in times of financial distress.

‘KEEP IN MIND THAT BOTH ‘POTS’ EXIST FOR THE SAME REASON: TO FUND YOUR RETIREMENT’

WILL IT MAKE YOUR LIFE BETTER OR WORSE?
This new system enables the fortunate few who do have the means to fund a retirement scheme to effectively cut into that investment. The danger is that today’s emergency spending ends up diminishing your retirement nest egg. So, while we’re being given more freedom and flexibility, this has the counter-intuitive effect of making us all a little more susceptible to our own bad judgement.

On the other hand, the new system is there to help us out in times of dire need – and to be of service during financial emergencies. Its structure, ensuring that the greater portion of our retirement funds remain untouchable, is a saving grace. By ensuring that two-thirds is locked up tight, the system provides a measure of security against our own potentially short-sighted impulses.

WHAT DO YOU NEED TO DO?
Mostly, nothing. Your existing investments retain their current value, they operate according to the same rules of investment and follow the same earning patterns. You are not contributing any more or any less and, as long as you do not make a withdrawal from your savings pot, the amount of money you have invested for retirement will remain the same. They will also have the same levels of growth, and are subject to the same tax laws.

Unless you were 55 or older on 1 March 2021 (in other words, you were eligible for retirement), your transition to the new system is automatic. If you were already 55, you can choose whether you want to opt into the two-pot system or not. If you are super-cautious, have a more complicated system of funds and schemes, or are already confused about where your retirement funds are ending up, it would be a good idea to consult a financial advisor and seek clarification.

WHAT HAPPENS TO YOUR EXISTING RETIREMENT FUNDS?
The new rules will only apply to new contributions made as of 1 September 2024. Retirement savings accumulated prior to that date are ring-fenced and referred to as the ‘vested pot’. However, in order to kickstart the new system and make some of your existing retirement money available to you, an amount equal to 10% of your existing retirement savings will automatically be used to seed your ‘savings pot’. This seed money that will go into your ‘savings pot’ is capped at R30 000. In other words, if you had R300 000 in your retirement fund at the end of August, there would automatically be R30 000 available to you in your savings pot on 1 September.

From this date, new contributions to your retirement funds are now split: one-third to the savings pot, two-thirds to the retirement pot. Returns earned on your contributions will similarly accumulate in either of the respective pots.

THE PITFALLS (AND HOW TO AVOID THEM)
Keep in mind that your retirement contributions exist to serve you once you no longer have a regular salary. The ‘savings pot’ portion of these fund should not be thought of as just another discretionary resource for everyday, ordinary expenses. As one retirement fund expert put it, ‘It should not be used to service your car. It’s there for serious emergencies.’ 

Essential to consider is that there will be administrative costs associated with each withdrawal and there will be tax implications. Any money you withdraw from your savings pot will be taxed at your marginal tax rate. The amount you withdraw, because it is adding to your annual ‘income’, is not only taxable but could potentially push you into a higher tax bracket, so act with extreme caution when considering any withdrawal. If you are a high- earner, the amount you withdraw from your savings pot could be taxed as much as 45% – or it might cause your entire annual earnings to be taxed at a higher-than- usual rate.

Also be aware that, before you are paid from your savings pot, your retirement fund administrator will receive a tax directive from SARS and will, accordingly, deduct the required tax before you are paid your benefit. You might receive much less cash than anticipated.

The tax implications of withdrawals from your savings pot might make them more trouble than they’re worth. Not only will you be diminishing your retirement savings, you’ll be throwing some of that money away. So, before making a withdrawal, ensure you know precisely what fees and taxes you’ll incur.

OUT OF SIGHT, OUT OF MIND
Keep in mind that both ‘pots’ exist for the same reason: to fund your retirement. Just because there’s now a pot of money available to you, does not mean that you have to dip into it. Avoid temptation entirely by forgetting that the savings pot even exists. By ignoring it, you’ll reap greater benefits and have accumulated better savings after retirement. Rather than plundering your savings pot, it's a good idea to consider increasing the voluntary contribution to your retirement fund. The more disciplined you are now, the greater your prospects for a more comfortable reality in the future.

By: Keith Barnes
Photographs: Gallo/Getty Images, Pexels