2 Pot Retirement System

2 Pots Are Better Than 1

By Fiona Wakelin

The two-pot retirement system aims to empower more South Africans to preserve their retirement savings when they leave a job or change employment, while enabling controlled access to these savings in times of financial hardship – Sanlam

From 1 September 2024 retirement fund members will be able to make partial withdrawals from their retirement funds before retirement, while preserving a portion that can only be accessed at retirement. The purpose of this is to offer flexibility to those fund members experiencing tough financial times, while at the same time supporting long-term retirement

In many cases, retirement funds. Under the current system members are resigning from their funds to access savings to pay off debt –which is a short term solution and does not bode well for retirement.

This new two-pot system has been conceptualised and designed so that those fund members who are experiencing hard times financially will have access to a portion of the savings component before retirement. A “divine and” instead of an “either or” approach.

What Does This Mean For You?

The new system will apply to all private sector and public sector retirement funds, except for the old generation legacy retirement annuity policies, or funds with no active participating members. Pensioners and members of provident funds who 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.

How It Will Work - The 3 Components

The following shows how this system will actually work in practical terms. Importantly the reform will create 3 components:

• Savings Component

• Retirement Component

• Vested Component

After September 1, only the savings and retirement components will receive retirement contributions while the vested component will contain those retirement benefits accumulated by the member prior to implementation date - which will continue to accumulate investment growth.

Where Do The 2 Pots Come In?

Under the new system, retirement contributions will be split by retirement funds into the savings pot and the retirement pot. A ratio of 1/3 of total contributions will go into the savings component and 2/3 of total contributions into the retirement component.

The savings pot will be accessible at any time, but withdrawals must be a minimum of R2 000 with only one withdrawal being permitted in a tax year. There is no maximum withdrawal limit and the withdrawal will be taxed at the member’s own marginal tax rate.

The Retirement Pot Cannot Be Accessed On Resignation - Only At Retirement

The vested component –which is the retirement value accumulated up until 31 Augustwill not take further contributions - if you resign sometime in the future, you will still be able to access it or have it transferred to a preservation fund.

Getting Things Started -Seeding The Savings Pot

To get things started, 10% or R30 000 (whichever is lower) of the value of your fund on 31st August 2024 will be allocated to the savings pot. This seeding capital will be a once-off transfer and will not be repeated.

Who Is Excluded From The 2 Pot Plan?

Provident fund members who were 55 years or older on 1 March 2021 will not be included – but they can participate if they choose to do so by applying to their provident funds; once they choose to take part in the 2 pot system, this will be a done deal and they cannot reverse their decision.

Next Up For Retirement Funds

After the Pension Funds Amendment Bill and the Revenue Laws Amendment Bill have been signed by the President, retirement funds will have to apply for rule amendments with the Financial Sector Conduct Authority in order to get ready for 1 September 2024. They will communicate with their members on how the system will operate.

What Should You Do?

Tips and Advice From National Treasury

1. Please ensure that your retirement fund has your correct contact details. This is important so that they can contact you about the reform.

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 implementation of the reform.

3. Carefully consider your options and seek advice from an accredited financial advisor.

• Identify your long-term savings goals and plan for your future – and try to save as much as you can when you can. Unforeseen events may mean that you must adjust the plan – but start with a plan. You will have more flexibility than ever before – but that comes with the responsibility to protect yourself now and for the future.

• If you are a provident fund member that was over the age of 55 on 1 March 2021, then you have the option of structuring your contributions to follow the two-pot design.

• If you have contributed to your retirement fund over several years, you may have access to a withdrawal from the seeding capital on implementation. Do not make hasty decisions to take a withdrawal. It may be tempting to make a withdrawal as soon as possible – but keep in mind that you will be giving up the amount drawn plus all interest on that amount in retirement. Plus, if you wait to withdraw money from the savings component until retirement, it will attract less tax.

• Consider whether you would rather transfer funds from your savings component to the retirement component.

4. Do not let anyone pressure you to do anything that is not in your interest. While it is good to help people when one can, you have worked hard to save for retirement – and the longer it remains invested, the better.

5. If you need help but do not know where to start, contact your retirement fund.

Source: Sanlam, National Treasury