How the two-pot retirement system will affect you

President Cyril Ramaphosa signed the long-awaited two-pot retirement system into law on June 1, 2024.

According to a statement by the presidency, the Revenue Laws Amendment Bill of 2023, which established a two-pot system, gives members access to retirement savings without having to resign or cash out their entire pension funds.

It also confirmed the effective date as September 1, 2024.

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The new retirement regime intends to address the concerns related to lack of preservation before retirement and lack of access to retirement funds by households in financial distress.

Germiston City News chatted to Ester Ochse, the product head at FNB Integrated Advice, about what this means for the working class.

“This system will have a significant impact on people’s retirement investments.

“The two-pot system will give South Africans access to some of their retirement savings in the case of emergencies while ensuring they still save the majority left in their pension or retirement funds.

“The Covid-19 pandemic highlighted the need for people to access a portion of their savings or investments due to the impact of job and income losses.

“Consider this scenario – you lose your job, and as a result, you and your family will lose your home because you cannot afford to pay your rent or bond – the money in your savings pot could save your family from becoming homeless and buy you some time to find another job,” said Ochse.

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Samukelo Zwane, the head of product at FNB Wealth and Investments, said this system is an improvement to the retirement regulations.

“The two-pot system’s implementation is a big improvement for SA’s retirement regulations and will aid in striking a healthy balance between access to retirement savings and preservation.

Currently, most retirement fund members choose to access and spend part or all of their funds rather than preserve their retirement savings when they change jobs.

“This has been a major contributing factor to people being unable to retire comfortably when the time comes,” said Zwane.

Understanding the new two-pot retirement system

What is the two-pot system?

It is a retirement savings divided into three pots: vested pot, retirement pot and your savings pot. From September 1, your retirement savings will be treated in the following manner:

• Everything you have already saved will be classified as vested and sit in a vested pot. The existing scheme rules will continue to apply to the vested pot.

• Two-thirds of all future contributions will go into your retirement pot and cannot be accessed until the day you retire.

• One-third of future contributions will go into your savings pot, which you can access in an emergency, but only once each tax year (March 1 to February 28/29).

What happens on September 1, 2024?

Ten per cent of your existing retirement fund will get transferred to the savings pot, with a maximum cap of R30 000. For future contributions, one-third goes to savings and two-thirds to retirement.

For example, if you contribute R1 200 monthly to retirement, from September 1, R800 will go into your retirement pot and R400 into your savings pot.

When can one use the money in the savings pot?

Access to the savings pot is permitted once per tax year (March 1 to the end of February). One can make a minimum withdrawal of R2 000, which will be taxed according to your marginal tax rate determined by SARS.

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What happens if one resigns or loses their job?
The funds in the savings pot can be reaccessed in the same tax year if you resign or are retrenched and cease to be a member of the fund as a result. Remember, any money in your vested pot is still subject to the old rules. You cannot touch your retirement pot until retirement.

What happens to the savings pot at retirement?
At retirement, you can decide to take some or all of the money in your savings pot as a single lump sum payment subject to the applicable tax or choose to use those funds to buy an annuity as with the retirement pot.

How will the withdrawal affect one’s future?

Saving for retirement is crucial. When you take money out of your retirement savings, it can slow down this growth.

It might feel like a small amount of money you are withdrawing now, but it could make a big difference to the amount in your retirement fund at your retirement date. It will also limit your available lump sum value at retirement.

“So, it is best only to take money out if it is an emergency and you have no other options,” said Zwane.

Why are people who were provident fund members and over 55 on March 1, 2021, exempt from the new rules?
Very complicated rules apply to these members that can exempt them from participating in the two-pot system.

One of the main factors is that these members are close to retirement, and introducing the new rules might negatively impact their retirement planning and ensure their old provident fund benefits remain protected.

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“As a leading provider of integrated financial and lifestyle services, we strongly advise South Africans to consult a financial advisor so they can make a well-informed decision on whether it would be appropriate to withdraw their savings pot.

“We also emphasise that accessed retirement funds should not be used for instant gratification pleasures, such as going on holiday or buying a luxury item,” said Ochse.