THE two-pot system, well three pots if you are being technical, is a new retirement system that will allow South Africans to access a portion of their retirement savings in the event of emergencies. This kicked into effect on September 1.
A third of their retirement funds will be preserved in a savings component that can be accessed at any point, while the remaining two-thirds are reserved for retirement, ensuring financial security.
You might ask: What is the earliest you can retire?
To access your retirement component, you must be at least 55 years of age, and the full amount must be paid in the form of a retirement annuity.
How does the two-pot retirement system work?
Your retirement contributions will be divided into different components, or pots.
Your accumulated retirement savings up until August 31, 2024, will go into a vested component. From September 1, 2024, a third of contributions will go into a savings component and the remaining two-thirds into a retirement component.
It’s important to note that there will be a one-off compulsory transfer of 10% of your retirement savings on August 31, 2024 (capped at R30 000) to the savings component. The rest of the money will remain in your vested component.
The vested and retirement components will remain subject to the current retirement restrictions, while the savings component will be accessible at any time before retirement, as a “rainy day” fund.
The most important parts to note are the withdrawal limitations and the tax effects on the withdrawal of the funds.
You can make a minimum withdrawal of R2 000 from the savings pot, with no maximum limit. Withdrawals are permitted once a tax year, between March 1 and February 28, and are taxable based on your marginal tax rate.
If you choose not to withdraw from your savings pot, the remaining funds will be taxed as a lump sum benefit upon retirement, following the retirement lump sum tax table. The tax rates are generally lower than the marginal tax rates applied to withdrawals before retirement.
When we think about the tax effects, any amount accessed in cash as a savings withdrawal benefit will be taxed at your marginal income tax rate, which will depend on your taxable income for the tax year, including the withdrawal amount. The retirement fund or its administrator will apply for a tax directive from the South African Revenue Service and deduct the tax before paying you your benefit. Sars will require your specific information to issue a directive. If certain information has not been provided to the retirement fund, the withdrawal will not be processed.
An example of a transition into the two-pot system.
Jack has R1 million in his retirement fund before September 1, 2024. Jack contributes R10 000 a month into his retirement from his salary.
On September 1, 2024, 10% of Jack’s R1m will automatically be transferred into his “savings pot” (capped at R30 000)
Ten-percent of Jack’s R1 million is R100 000. Therefore, as it is capped the full R30 000 will be in Jack’s savings pot.
The remaining R970 000 will remain in Jack’s vested pot until retirement.
On September 1, 2024, Jack will have R970 000 in his vested pot and R30 000 (available for withdrawal) in his savings pot and R0 in his retirement pot.
When Jack makes his monthly contribution of R10 000, it will be split into R3 333 into savings pot and R6 666 into his retirement pot.
On October 1, 2024, Jack will have R970 000 in his vested pot, R33 333 in his savings pot and R6 666 in his retirement pot.
Jack has the ability to withdraw the R33 333 at any time during the tax year.
The two-pot system has the potential to create good outcomes for South Africans, helping those who desperately need some access, while ensuring greater levels of preservation due to the current inaccessibility of the retirement component.
Having some access to your retirement investment without having to resign from your employment might assist you when things get tough. However, it is imperative to remember that the intended purpose of your retirement investment is to provide you with an income in retirement. While the savings component allows you access, it is wise to guard against thinking of it as a normal savings account.
Each time you access a savings withdrawal benefit, the amount available to provide you with an income in retirement will be reduced. In addition, the savings withdrawal benefit will be taxed and has the potential to push you into a higher tax bracket, depending on your income and the value of the withdrawal.
Davron Chanderdeo is a practising chartered accountant. He provides accounting and tax consulting services. Follow him on Instagram @davrontalks