Change
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Foreword
by Khanyi Nzukuma
South Africa’s evolving retirement landscape
The Two-Pot Retirement System represents a significant evolution in the South African retirement landscape, addressing critical challenges that have long plagued our society. The previous dispensation, allowed individuals to make full withdrawals from their pension or provident funds upon resignation. This led to a distressing reality: too many South Africans later find themselves without sufficient capital to sustain them during retirement.
Unfortunately, it has also facilitated a trend where pre-retirement withdrawals were made irrespective of the punitive tax implications, leaving individuals with diminished resources and little hope of achieving financial security in their later years. The 2023 Sanlam Benchmark Survey indicated that less than 10% of retirees can maintain their standard of living after retirement, due to under-saving and not preserving their assets.
The primary drivers for the introduction of the Two-Pot System are the alarming lack of pre-retirement preservation and the financial distress experienced by households facing emergencies or hardship. While it is understandable that individuals may feel compelled to access their retirement savings during difficult times, the long-term consequences of such decisions must not be underestimated. Any withdrawal from retirement savings prior to retirement will significantly reduce the capital available to generate a sustainable income in the future.
It is essential to recognise that the loss in value from such withdrawals is not limited to the amount taken. Retirement savings vehicles offer protection from creditors,
tax benefits, and exemption from estate duty in the event of death before retirement. These advantages, coupled with the compounding interest that accelerates the growth of savings, are crucial in building a secure financial foundation for retirement.
The value of financial advice in safeguarding the financial futures of all South Africans
Recovering from a premature withdrawal is difficult, if not impossible, in purely monetary terms. Therefore, it is imperative that individuals approach such decisions with caution, fully understanding the longterm implications. I urge every South African to seek the guidance of a professional financial adviser before making any decisions regarding their retirement savings.
The Two-Pot Retirement System is a step towards safeguarding the financial futures of all South Africans, ensuring that retirement is a time of security, dignity, and peace of mind.
Your partner in confident investing
At Glacier, we’re more than just a financial services provider – we’re your trusted partner on the path to ensuring financial prosperity. Whether you’re an investor creating wealth or preserving it, or an adviser guiding clients toward a confident future, Glacier offers a comprehensive suite of solutions designed to accompany investors through every stage of life.
Experience the Glacier difference today. Visit our website at www.glacierinsights.co.za to discover more about Glacier’s world class solutions. Alternatively, if you have any queries you may contact our Communication Centre on 021 917 9002 / 0860 452 364.
Why South Africa’s retirement regulations have changed
The dilemma with the previous retirement regime in South Africa is that you were allowed to make full withdrawals from your retirement savings way before your retirement. In the case of pension or provident funds, the types of funds offered by employers to employees, you could withdraw when you left your job. When it came to pension preservation or provident preservation fund(s), you could also make a once-off withdrawal and effectively empty these savings before retirement.
These withdrawals took place despite the applicable tax rates, leaving South Africans high and dry when it came to capital to provide an income during retirement. Over the past few years, the Sanlam Benchmark Survey consumer studies have indicated alarming realities amongst the respondents. One study indicated about 75% of South African retirees are reliant on state old-age grants as their main income source during their golden years. Another study
indicated that 55% of respondents need to cut back on non-essentials to survive. Worryingly, these non-essentials included healthcare provision for 11% of the respondents.
The main reasons for the two-pot retirement system are twofold: it addresses this lack of pre-retirement preservation, as well as the financial distress many households face in the case of emergencies and hardship.
In this guide we provide the basics on the two-pot system to you, the member of a retirement fund.
The dilemma in detail
Under the old rules, when a member of a pension or provident fund resigned from their employer, the member could choose to preserve their retirement savings in the employer fund as a paid-up member, or in a preservation fund or retirement annuity fund of their choice.
Alternatively, the member could cash out the full value in the fund. If a member chose to cash out the funds, such a withdrawal was taxed according to the withdrawal tax table, with the first R27 500 being taxed at 0%.
Historically, many members have chosen to withdraw from their funds when they resign, with some even choosing to resign from their jobs just to access their savings in a provident or pension fund in times of hardship. As a result, we now have the government interventions, which are aimed at: addressing the issue of members depleting their retirement savings before retirement, providing members limited access to retirement savings before retirement without needing to resign, and encouraging long-term preservation.
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Understanding the two-pot system
It is important to note that you did not lose any existing rights, and your retirement savings’ value as on 31 August 2024 was not affected. What has changed is how and when you’ll have access to your retirement savings from 1 September 2024.
Which retirement funds does the two-pot system apply to?
The new system applies to all retirement funds, i.e. pension, provident, retirement annuity and preservation funds.
How does the two-pot retirement system work?
Your retirement contributions (past and future) are divided into three components (also referred to as pots). The idea is to empower more South Africans to preserve their retirement savings when changing or leaving a job, and to allow people to access their savings component if they experience financial hardship.
From 1 September 2024:
component of your retirement fund (10% of the value in the vested component on 31 August 2024 capped at R30 000). After this, one-third of all new contributions goes into this component, which will also grow due to investment returns.
This
The
retirement component
Two-thirds goes into a retirement component, which you cannot touch until retirement.
All future growth and earnings remain in the retirement component until you retire. These funds must then be used to buy a retirement income, unless legislated minimum values apply.
What is the ‘vested component’?
This component holds all the savings that accumulated in your retirement fund up until 31 August 2024. These savings will stay under the old retirement fund legislation.
You could potentially have vested rights and/or non-vested rights portions in your vested component. These types of rights relate to the annuitisation rules of 2021.
Access prior to retirement
• For retirement annuity funds, you can’t access any funds in the vested component until you retire.
• For pension and provident funds, the vested component is exempt from compulsory preservation, so you can withdraw a taxable lump sum should you resign or be retrenched.
• For preservation funds, you can withdraw a once-off partial/full taxable lump sum from the vested component before retirement.
Access is also possible in the case of successful compliance with the three years cessation of residency rule, disability or death, subject to the applicable fund rules.
What is in the pots, in a nutshell
All savings accumulated in your retirement fund on 31 August 2024 minus the amount allocated to the savings component, but plus the growth on the capital.
Access at retirement
Your benefits in a vested rights portion are available as a lump sum (subject to tax), as an annuity, or as a combination. Benefits in a non-vested rights portion are subject to the purchase of a compulsory annuity with at least twothirds of the value, unless the value falls below a prescribed minimum, in which case the two-thirds will be available as a taxable cash lump sum.
Two-thirds of your contributions after 1 September 2024 plus the growth on these contributions.
Your allocated starting value plus one-third of your contributions after 1 September 2024, plus the growth on these contributions.
Is anybody excluded from the two-pot system?
If you are a member of a provident and/or provident preservation fund, were 55 years or older on 1 March 2021 and are still a member of that fund, you can choose to be a part of the new system.
• By default, you are not included, so if you want to be a part of the two-pot system, you have to OPT IN to the new system
• You have a once-off chance to OPT IN
• You have 12 months from 1 September 2024 to make this choice.
If you OPT IN, your savings component will also be ‘seeded’. This ‘seeding’ is an allocation from your vested component to your savings component and is a compulsory process.
If you OPT IN, the following applies:
• You will have a savings withdrawal benefit available, once per tax year
• At retirement: contributions to a retirement component must be annuitised (buy an income for retirement) and your savings component will be available as cash or an annuity.
If you remain OPTED OUT, the following applies:
• You contribute to a vested component only
• You will have no savings withdrawal benefits available
• At retirement: your entire benefit is available as cash, subject to tax.
• You will have a vested component and a savings component and possibly a retirement component in the future
There are other exclusions from the system, i.e. legacy retirement annuity policies that do not apply at Glacier. Consult your financial adviser should you think that you qualify for this.
Some retirement fund members do not have to take part in the new system
members
By default they are not included, so they have to opt into the new system.
They have a once-off election to opt in.
IN
• Vested, savings and retirement component
• Savings component withdrawal benefits available
• Retirement: contributions to retirement component must be annuitised. Savings component available as cash or annuity.
They have 12 months from 1 September 2024 to make this choice. If they opt in, their savings components will also be ‘seeded’. The allocation amount will be calculated on the last day of the month in which the choice to opt in is made.
OUT
• Contribute to vested component only
• No savings component withdrawal benefit available
• Reirement: entire benefit available as cash subject to tax.
These
can choose to be part of the new system.
The Pros and Cons
The two-pot retirement system will improve outcomes for younger fund members who invest most of their contributions under the system and can even benefit older fund members who remain disciplined with the savings component. Any withdrawal from retirement savings prior to retirement will certainly have a detrimental impact on your retirement, as you will have less capital with which to purchase an income.
Pros
• Preservation of retirement savings: Encourages the preservation of the majority of retirement savings, ensuring higher capital for retirement.
• Increased flexibility: You can access a portion of your retirement savings before retirement, providing financial flexibility in emergencies.
retirement are subject to taxation at the member’s marginal tax rate.
• Protection against financial hardship: Provides a safety net for those facing financial difficulties, reducing the need for high-interest debt.
• Automatic enrolment: All members of applicable retirement funds are automatically enrolled, ensuring everyone benefits without needing initial action.
Cons
• Potential for reduced retirement savings: Frequent withdrawals from the savings component could lead to insufficient funds in retirement.
• Taxation on withdrawals: Withdrawals from the savings component before
• Complexity: Adds complexity to retirement planning, requiring members to understand the impact of different types of withdrawals and their tax consequences on future benefits.
• Risk of mismanagement: Members might misuse their withdrawals, jeopardising their financial security in retirement.
• Administrative burden: Requires significant administrative changes for retirement funds.
You can lose out on the benefit of compound interest if you withdraw frequently. Compound interest is beneficial because it allows your investment to grow exponentially over time, as you earn interest on both your initial principal and the accumulated interest from previous periods.
What happens at retirement?
Retirement options in the vested component
Options at retirement are based on the pre-implementation retirement rules. The rights you had remain
The full balance is available as: a combination.
Retirement options in the retirement component
You can’t withdraw a cash lump sum from the retirement component at retirement. All the retirement savings in this component must be used to purchase a compulsory annuity which
* If the full value of the retirement component + 2/3 of the non-vested rights portion in the vested component of the retirement component and the amount in the non-vested rights portion of the vested component may be taken as a taxable cash
Compulsory annuity
If you purchase an annuity (for example a living and/or life annuity) at retirement, the income paid from the annuity will be taxed at marginal tax rates according to
Retirement options in the savings component
At retirement, you may take up to the full balance that is left in this component as a cash lump sum. You can purchase a compulsory annuity with the value in this component.
The cash lump sum is taxed according to the retirement lump sum tax table. Previous retirement fund lump sums received may be taken into account in terms of the principle of
You will receive the lump sum net of tax.
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Withdrawals allowed before retirement
Vested component
The one allowable withdrawal in a preservation fund remains available; however, this allowable withdrawal will only be from the vested component under the two-pot system. Such a withdrawal will continue to be deducted proportionally from both the vested and non-vested rights portions within the vested component.
You will not be allowed to withdraw from the vested component before retirement if you are saving in a retirement annuity fund, unless the value in all components and all contracts under a membership, is R15 000 or less.
Retirement component
No withdrawals from the retirement component are allowed before retirement for preservation fund and retirement annuity fund members.
Withdrawal before retirement from the retirement component is only possible in special cases as per legislation and subject to the applicable fund rules.
Savings component
You are allowed one withdrawal, called a Savings Withdrawal Benefit (SWB), per tax year (1 March to 28 February) from the savings component. The minimum withdrawal amount is R2 000 (there is, however, no limit on the maximum amount a member can withdraw).
Savings Withdrawal Benefit (SWB) - the details
One SWB allowed per tax year
You are allowed one SWB per tax year and per contract unless a termination SWB applies.
SWB is applied per contract
You are allowed one SWB per tax year per
contract. Therefore, if you have more than one contract, you will be able to take one SWB from each contract per tax year.
R2 000 minimum
Your savings component must have a minimum value of R2 000 and the requested SWB must be for a minimum amount of R2 000 unless a termination SWB applies (see below).
Termination SWB
If you have already used your SWB for the tax year and:
1. you terminate your membership in that same tax year (termination does not include the retirement, early retirement, ill health, disability or death events) and 2. the value in your savings component is R2 000 or less, a second ‘termination’ SWB may be allowed for that particular tax year [referred to as a termination commutation].
Requirements for a successful withdrawal request
1. Tax Number
You must be registered as a taxpayer with SARS and must provide your tax number.
If you do not have a tax number, then the SARS e-filing system can be used to register for tax purposes. Glacier will not be able to assist with this registration; request assistance from your financial intermediary or tax practitioner.
2.
Value of annual remuneration
You will be required to provide your annual remuneration on the withdrawal form. Remuneration means income paid for services and includes, among others, things like salary, monetary benefits, bonuses, commission, fees, allowances, advances, and even pension income. In other words, amounts earned that you must pay tax on. It is important to provide the correct value, as an
understatement will result in an annual assessment debt, when too low a tax value was withheld at the time of the savings withdrawal benefit.
How does the tax on a withdrawal from the savings component work?
One of the key aspects of the twopot system is its tax implications. It is important that you are aware of the tax implications of withdrawing part of your retirement savings early. Retirement fund contributions are tax-deductible, and the savings grow tax-free until withdrawal.
However, the two-pot system introduces a more nuanced approach to the taxation of pre-retirement withdrawals. The savings component, which allows for withdrawals before retirement, is subject to different tax treatment. Every withdrawal you make from your savings component is added to your income and will be taxed at marginal tax rates at the time of withdrawal. If your annual income is R300 000, your marginal tax rate according to the 2024/25 income tax table will be 26%.
This means that while the savings component offers greater liquidity, it also comes with immediate tax consequences, potentially reducing the net amount available for withdrawal. If, however, a member waits until retirement to withdraw from the savings component, then the retirement lump sum tax table applies and the first R550 000 is taxed at 0%, making it potentially tax-free. However, the R550 000 tax benefit is cumulative over your lifetime and may have already been used when you reach retirement. The principle of aggregation also applies. It is necessary to consult your financial adviser or a tax expert to fully understand the tax consequences.
On the other hand, the retirement
component will continue to benefit from growth because you are not allowed to access it until retirement. Contributions to all your components will remain taxdeductible, and the money will grow tax-free until retirement. Upon retirement, allowable withdrawals from a component will be taxed according to the existing retirement lump sum tax tables, which generally offer more favourable rates compared to regular income tax rates.
Tax on pre-retirement withdrawals Tax on a withdrawal from the vested component
Any pre-retirement cash lump sum taken from the vested component (e.g. onceoff withdrawal from preservation fund) will be taxed according to the withdrawal lump sum tax table. Previous retirement fund lump sums received may be taken into account in terms of the principle of aggregation. You will receive the lump sum net of tax.
Tax on withdrawal from the retirement component
In principle, you will not be allowed to withdraw from this component before retirement.
Tax on a SWB from the savings component
An SWB will be included in your income for the respective tax year and taxed at marginal tax rates. At assessment, SARS will include the SWB amount in your total taxable income for the year, taking into account the tax that has already been withheld. This withdrawal from your savings component may cause you to fall within a higher marginal tax bracket for the year of assessment, resulting in a higher marginal tax rate being applied to that year’s income.
• The administrator will apply for a tax directive to SARS for the requested SWB
value, minus the administrator’s fees and costs. The tax directive will indicate the amount of tax the administrator must withhold (and pay to SARS).
• Any outstanding tax owed to SARS will also be deducted from the withdrawal amount.
• The administrator will pay the net amount as a SWB to the member.
• The withdrawal event can only happen after the administrator has requested and received a tax directive from the South African Revenue Service (SARS).
• A tax directive will need to be acquired for each withdrawal done.
• A tax directive application cannot be cancelled.
Tax simulation for SWB
You can make use of the SARS eFiling calculator that will be available to individuals and tax practitioners to calculate the estimated tax liability on the SWB.
Outstanding tax debt
The eFiling simulation will contain a generic warning that outstanding tax debts will also be deducted by SARS during the directive process. Only a taxpayer is able to obtain the value of outstanding tax debt via a Statement of Account (SOA) on the eFiling system or the MobiApp.
Deductions from your retirement savings
Any valid deductions from your retirement savings, in terms of the Pension Funds Act, including a valid claim against you (for example maintenance claims) may limit your access to your savings component. It may also delay the payment of a SWB from the savings component.
Divorce orders and maintenance ordersSection 37D prohibitions
The Pension Funds Act limits a member’s access to a SWB under certain circumstances.
Divorce orders - As per the Pension Funds Act, a fund may not, without the consent of the non-member spouse, permit a savings withdrawal benefit to be taken by a member if the fund received written notification from the member or non-member spouse with proof that:
1. a divorce has been instituted;
2. an application has been made for a court order in respect of the division of assets of a marriage.
What happens when you leave South Africa permanently?
If you have not used your one SWB within your third year being a non-tax resident (i.e. during the final year of your cessation of residency required by SARS), you are allowed a SWB of minimum R2 000 from your savings component.
If you have already used your one SWB benefit within your third year of being a non-tax resident (i.e. during the final year of your three-year cessation of residency required by SARS) and your savings component value is less than R2 000, you are allowed a second withdrawal from your savings component before finalising your emigration claim.
If money remains in your savings component once you have met the threeyear cessation of residency rule, at Glacier we will automatically transfer this value to your retirement component before finalising your emigration claim, unless you instruct us otherwise.
You can withdraw the total amount from your retirement and vested components as a cash lump sum, once you have met the three-year cessation of residency rule required by SARS, which will be taxed according to the withdrawal lump sum tax table.
Transfers allowed under the two-pot system
The illustration below depicts the transfers that are allowed within a fund (intra-fund) and between retirement funds (inter-fund) under the system.
Are defined benefit funds affected?
The implementation of the two-pot system affects all retirement funds, including defined benefit funds.
Many public sector funds are defined benefit funds, while most private sector funds are defined contribution funds.
Public sector funds are defined in the Income Tax Act and include the following:
• Retirement funds that are not the Government Employees Pension Fund (GEPF), such as municipal funds
• Any pension fund established for employees of a control board as defined in the Marketing of Agricultural Products Act, or for
The value of the benefits at retirement is determined by a formula contained in the fund rules and does not depend on how much you or your employer have contributed.
employees of the Development Bank of Southern Africa
• Any provident fund (retirement funds offered by employers to employees) established for employees of municipal entity funds created under the Municipal Systems Act
• The Government Employees Pension Fund.
If you are member of a defined benefit fund, the nuances around application of the two-pot system means that you must consult with your fund’s retirement benefit councillors, your human resources division at your employer and your financial adviser.
The retirement benefit is equivalent to the total retirement fund value, which consists of your accumulated contributions, your employer’s contributions and investment returns.
The employer carries the investment risk. You carry the investment risk.
The retirement pension must be provided by the fund regardless of fund performance.
The income you will receive during retirement will depend on the investment returns of the fund.
Frequently asked questions
Can I access any of my funds in the savings component from 1 September 2024?
Yes, but there are limits in terms of the amount and the number of times you can withdraw. Your vested component provides initial seed capital for your savings component. 10% of your vested component balance (capped at R30 000) is allocated to your savings component and you need a balance of at least R2 000 before you can make a withdrawal. For example, if you had R30 000 in your vested component on 31 August 2024, R3 000 is transferred to your savings component.
What happens to legacy retirement annuity fund policies?
Legacy policies are exempt from the twopot retirement system if they conform to specific characteristics in the legislation.
What funds can I access if retrenched?
For pension funds and provident funds, if you are retrenched you can access all the funds in your vested component, as well as your accumulated savings in the savings component. For retirement annuities, you can access your savings component.
What happens in the event of a divorce?
Divorce orders will continue to be applied against your entire retirement savings. Meaning that the divorce order claim will be effected proportionally across all components. The fund must be notified if the process of getting divorced has started.
How will the withdrawal I take at resignation impact the tax I pay on future retirement cash lump sums?
A withdrawal from the vested component will be taken into consideration when calculating the tax on future retirement cash lump sums, as the retirement fund lump sum tax tables are subject to the principle of aggregation. Any annual withdrawal or resignation withdrawal made from the savings component will be taxed in that tax year at marginal tax rates;
however, these withdrawals will not be considered for the principle of aggregation regarding future retirement cash lump sums.
How can I ensure I retire comfortably?
Try not to use these new opportunities unless you absolutely must. See your retirement savings as a long-term savings plan that you only access when you retire, and not as a bank account. A better option is to set up an emergency fund and put away money for that rainy day when you might need it urgently. Remember, savings in retirement funds are protected from creditors, have tax benefits and are not estate dutiable in the event of death before retirement. These benefits, along with the power that compounded interest growth gives to future income, go a long way to ensure financial security in retirement. There is very little chance of recovering from such a withdrawal in monetary terms, and it’s important not to make this decision lightly or without the advice of a financial adviser.
Can I expect other deductions in addition to tax?
There may be administration fees charged on these transactions, which may differ between administrators. There is no prescribed fee but it must be fair and transparent.
Is there anything else that might restrict me from accessing my fund?
In special circumstances, if you owe amounts to third parties such as for housing loans, employer judgements or unpaid maintenance, you may have restricted access to your savings component. Valid deductions and claims against your retirement savings can limit your access via the SWB.
What Glacier clients need to know
Which Glacier retirement funds does the new two-pot system apply to?
• Personal Portfolios Retirement Annuity Fund
• Personal Portfolios Preservation Provident Fund
• Personal Portfolios Preservation Pension Fund
Cumulus Echo Preserver products
• Sanlam Preservation Pension Fund
• Sanlam Preservation Provident Fund
What does the new retirement system mean for clients invested in the Glacier Retirement Fund Solution for employer funds?
The Glacier Retirement Fund Solution is a special investment option available to the members of employer funds who approved this option for their members. The two-pot system will not influence the investment option availability, but the employer retirement fund is subject to the system.
On the Glacier side, the investment process will not change. On the retirement fund side, implementation of the system is dependent on the applicable retirement fund. Retirement fund members who are clients in the Glacier Retirement Fund Solution must conform to the rules of the retirement fund and the law.
If you are invested in the Glacier Retirement Fund Solution and have any questions about implementation of the system, the best option would be to contact your employer retirement fund directly.
“Identify your long-term savings goals and plan for your future – and try to save as much as you can when you can.”
What should you, as a member of a fund, do?
1. Ensure your retirement fund has your correct contact details. This is important so they can contact you about the two-pot system.
2. Keep an eye out for communication from your retirement fund administrator or the trustees of the fund, as they need to communicate with members about the twopot system.
3. Carefully consider your options and seek advice from an accredited financial adviser.
4. Do not let anyone pressure you to do anything that is not in your best interest. While it is good to help people when one can, you have worked hard to save for retirement – and the longer your funds remain invested, the better.
5. If you need help but do not know where to start, contact your retirement fund.
Our key messages to you:
Glacier is committed to ensuring full compliance with the legal requirements surrounding the two-pot retirement system, providing clear and accurate information to all stakeholders.
Understanding the two-pot system is crucial for making informed retirement decisions. We are here to guide you through this significant change.
Any withdrawal from retirement savings prior to retirement will have a detrimental impact on ensuring financial security in retirement. Understand the power of compounding and the importance of not making this decision lightly.
A trusted financial intermediary is invaluable in navigating complex investment choices. Let our experts guide you to secure your financial future.
Don’t clear your cart with your retirement savings. Your retirement fund is not an ATM, so drown out the noise and stick to your financial plan!
