The practical implications of the two-pot retirement system

Although the implementation date of the two-pot retirement system is merely a month away, many pension fund members and employers are still not sure about the practical implications.

This has prompted the Building Industry Bargaining Council (BIBC) to offer a clear explanation of why this legislation was drafted and, more importantly, how it will affect them directly.

The two-pot retirement system essentially 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, Danie Hattingh, principal officer of the BIBC Retirement Fund, explains.

“It is primarily a governmental measure aimed at preventing a repeat of the situation that arose during the Covid-19 pandemic when retrenched citizens did not have emergency funds to fall back on.”

The system applies to any South African who is a member of a pension fund, provident fund, retirement annuity or preservation fund and divides members’ benefits into two separate pots – a savings pot and a retirement pot, with one-third of contributions going into the savings pot, which can be accessed once a tax year if you need to.

“If you decide to make a withdrawal from your savings pot, you may withdraw everything in your savings pot as there is no cap on the maximum amount that you can withdraw. However, the minimum amount that can be withdrawn is set at R2 000 a year,” Hattingh says.

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Money in your retirement pot will be preserved for retirement

The retirement pot is an entirely different story, he says. When the system is implemented on 1 September, two-thirds of retirement fund contributions will be allocated to a worker’s retirement pot and this money must be preserved to buy a pension or annuity at retirement. This money cannot be withdrawn, even if someone leaves a job or retirement fund.

According to Hattingh, there are short as well as long-term considerations. “In the short-term, retirement fund members will be able to withdraw a small portion of their existing savings immediately once the system is implemented. This is commonly referred to as “seed capital”.

Seed funding (10% of the vested component to a maximum of R30 000, will be accessible for pension fund members from 1 September. However, Hattingh warns that members must be aware of tax implications, including potential changes to marginal tax rates and the impact on future compound interest and overall retirement savings by withdrawing their seed funding.

“The seed capital will be limited to 10% of the amount in your retirement fund account on 31 August 2024, subject to a maximum amount of R30 000. For you to have access to a withdrawal benefit of R30 000, the value of your retirement fund account on 31 August 2024 must be at least R300 000.”

When it comes to the longer term, Hattingh says as it is compulsory to preserve the retirement component on changing jobs, it is important to manage the transfer of this value and keep track of preserved values.

“The two-pot system is beneficial because it will allow individuals to access a portion of their retirement savings during times of financial hardship. However, accessing even a portion of your retirement savings upfront can undermine your eventual financial security upon retirement.”

ALSO READ: Two-pot retirement: Substantial work still needs to be done before 1 September

What employers and employees should do now

The BIBC has drawn up a list of considerations for employers and workers to ensure as seamless a transition as possible to the new system:

Employers must:

• Ensure updated employee details/information.
• Ensure HR and payroll staff are well informed about how the two-pot system works.
• Keep employees informed of developments.

Employees, on the other hand, must:

• Ensure their information is updated with their employers and include their first names and surnames as reflected at Home Affairs, ID/ passport number, cell number and tax number from the South African Revenue Service (Sars).
• Remember they will be taxed at marginal tax rates on withdrawals made from the savings pot. The retirement fund or its administrator will apply for a tax directive from Sars and deduct the tax before paying the benefit.
• Remember any withdrawals will require a tax directive from Sars. In the case of any outstanding debt to Sars, the tax man will issue a notice to pay this debt from the withdrawal amount first before any funds are paid to the member.
• Stay informed and read all communication issued by the employer and/or fund administrator.
• Consider options carefully and consult with a financial advisor if needed.