Understanding South Africa’s new ‘Two-Pot’ pensions system
The South African government brings a two-pot system for retirement funds, allowing savers to access a portion of their funds before retirement while preserving the rest for long-term savings.
The new ‘Two-Pot’ retirement system came into effect on 1 September 2024 changing South Africa’s retirement savings structure to improve financial security and encourage long-term retirement savings.
One of the main driving forces behind the introduction of the two-pot system is to provide retirement fund members access to a portion of their funds when facing financial difficulties in real emergencies, while promoting the preservation of most of the savings until retirement.
Many people have been waiting for the implementation date to gain access to this unexpected ‘windfall’. However, the Two-Pot retirement system marks a significant change in how retirement savings are managed. And it is crucial to understand how it operates, what are the potential benefits and how it may impact your retirement planning.
It is important to note that the new rules will only apply to new contributions after 1 September 2024. All retirement savings as of the effective date will be ringfenced as the ‘Vested Pot’, and the existing rules will continue to apply.
What is the Two-Pot Retirement System?
As of 1 September 2024, retirement contributions will be divided into two pots: a ‘Retirement Pot’, which must be retained for funding your income after retirement, and a ‘Savings Pot’, which is an allocation to your lump sum at retirement.
The Retirement Pot
This pot will hold two-thirds of your monthly retirement contributions from the 1 September 2024. It is preserved strictly for retirement, meaning you can only access it once you reach retirement age. This ensures that you have a solid financial foundation for your post-working years.
The Savings Pot
This pot will hold the remaining one-third of your monthly contributions. Unlike the retirement pot, you can access these funds at any time during a respective tax year but limited to one withdrawal per tax year. This option provides the member with the necessary financial flexibility should an unforeseen event arise.
Key Benefits of the Two-Pot System
1. Increased flexibility
The Savings Pot introduces much-needed flexibility into retirement planning. If unexpected financial challenges arise, you can access funds from this pot without waiting for retirement. This can be particularly beneficial in cases of job loss, medical emergencies or unforeseen expenses. The flexibility allows individuals to take control of their finances in a more dynamic way, without the need to raid their full retirement savings.
2. Stronger retirement security
By allocating two-thirds of your contributions to the Retirement Pot, the system ensures that you still accumulate savings for retirement. This design helps to protect your future by limiting the temptation of early withdrawal of large amounts, which could leave you vulnerable when you eventually retire.
3. Encourages savings discipline
The structure of the Two-Pot system encourages responsible financial behaviour. Since the Retirement Pot is locked until you retire, it creates a sense of financial discipline by ensuring that you’re consistently saving for your future. The Savings Pot meanwhile helps with managing short-term financial needs, reducing the likelihood of taking on expensive debt during difficult times.
Tax Implications of the Two-Pot System
For some people, the immediate tax impact may be low because their income is below the annual tax threshold or is in the lower tier tax brackets. However, it is important to quantify the impact before reaching a decision.
Any withdrawal from the Savings Pot will be considered a part of a taxpayer’s gross income and could therefore result in the taxable income in that tax year increasing sufficiently to move them into a higher tax bracket.
South African Revenue Service (SARS) has indicated that the pension scheme member must declare their annual income when making a withdrawal from their Savings Pot.
SARS is to issue a simulated tax directive setting out the amount of tax to be withheld on a withdrawal. This will be calculated as the difference between the tax payable on your standard income and the tax payable on your standard income plus the Savings Pot withdrawal.
The simulated tax directive will provide pension scheme members with the clarity needed to make an informed decision. Please bear in mind that SARS will also take into account all unpaid taxes when issuing a directive to a member.
If the member decides to proceed with the withdrawal, SARS will issue a final directive at which time the decision becomes final and cannot be cancelled. The relevant income tax will be automatically deducted from the amount received by the member.
How will this affect your existing retirement savings provision?
If you already have a retirement annuity, pension or provident fund, the Two-Pot system will not affect your accumulated savings up to 31 August 2024 because the new regulations are only applicable on contributions made after 1 September 2024.
On 1 September 2024, your existing retirement fund will be split into three components: savings, vested and retirement component. A 10% portion of your vested component on 31 August 2024, subject to a maximum cap of ZAR30,000, will be considered as the seeding capital for your Savings Pot. This will be a one-off event and not be an annual occurrence.
Considerations for your financial plan
While the Two-Pot system provides greater flexibility, it also requires careful planning to avoid prematurely depleting your Savings Pot.
It’s also important to take a proactive approach by regularly reviewing your retirement contributions and the overall performance of your retirement portfolio. Adjustments may be needed to align with your evolving financial needs and the new regulations under the Two-Pot system.
Conclusion
The introduction of the Two-Pot retirement system in South Africa presents both opportunities and responsibilities. It is designed to provide you with more control over your financial future, while ensuring that your retirement funding remains secure. With the right guidance and a well-structured plan, this new system can enhance your overall financial strategy, offering both short-term flexibility and long-term stability.
