An Introduction To
The Two-Pot Retirement System
The Two-Pot system applies to all retirement funds in South Africa, including pension funds, provident funds, retirement annuity funds and preservation funds. The only exception is that certain legacy retirement annuity funds are exempt. This new retirement system comes into effect on 1 September 2024.
This retirement system is a significantly different from the retirement system as we know it today. It is, however, a necessary reform as research shows that more than 90% of South African retirees are unable to maintain their standard of living into retirement due mainly to them accessing retirement savings during their working careers (withdrawing their retirement savings when they change jobs).
The Two-Pot system aims to address this and, over the longer-term due to forced preservation provisions, it is anticipated that retirement outcomes will be improved by around two times, even though members will have access to a portion of their retirement savings annually.
Two-Pot System
Explained
How does
The Two-Pot System work?
The Two-Pot system, in essence, creates three separate retirement savings components (“pots”) for each retirement fund member on 1 September 2024.
Your total accumulated savings balance in the Fund (Fund Credit) on 31 August 2024, the day before the implementation of the new system, is not subject to Two-Pot regulations and your rights in terms of this are protected. This “pot” is known as the Vested Component and will be subject to the same rules and income tax treatment governing retirement fund benefits prior to 1 September 2024.
No contributions can be added to this component after 31 August 2024. However, investment growth will still be earned on this “pot”.
From 1 September 2024, one third of your monthly contributions to the Fund (your contribution plus your employer’s contribution excluding Risk Cover contributions) will be allocated to the Savings Component together with any investment growth earned on the balance in this “pot”.
Members will be allowed, once every tax-year, to withdraw any amount available in the Savings Component, provided the amount is not less than R2,000. A Savings Component withdrawal does not require you to leave your job, and any withdrawal from the Savings Component, prior to retirement, will be taxed at your marginal tax rate (the rate of tax you pay on your normal taxable income) and not the Lump Sum Withdrawal Tax Table.
On 1 September 2024, 10% of the amount available in your Vested Component (Fund Credit value on 31 August 2024) will be transferred to your Savings Component, limited to a maximum amount of R30,000 and this transfer is referred to as “seed capital”. This “seed capital” transfer applies to all contributing and paid-up members.
The Retirement Component will also, on 1 September 2024, start with a zero balance as no contributions would have been made into this “pot”. From this date, two thirds of your monthly contributions to the Fund (your contribution plus your employer’s contribution but excluding Risk Cover contributions) will be allocated to this component plus any Investment growth earned on this “pot”.
No withdrawal benefit is permitted from this component even if you leave the employment of your employer. The accumulated value of the Retirement Component can only be accessed at retirement in which case it must be utilised to provide a monthly pension (it must be annuitised). However, in the event of your death, this component, together with the Vested Component and Savings Component, form part of the death benefit.
HOW WILL MY CONTRIBUTIONS BE TREATED
in The Two-Pot System?
MONTHLY CONTRIBUTIONS
1/3
Savings
Component
2/3
Retirement
Component
No contributions allowed
Vested
Component
WHAT ARE MY OPTIONS
when I reach retirement age?
Members may retire in the Fund at their Normal Retirement Age (NRA), or up to 10 years prior to this date provided they have reached age 50. They may also retire on any chosen later date, even if this date extends beyond their NRA. The following applies to each Two-Pot component at retirement date:
VESTED COMPONENT
You may apply for up to a maximum one-third lump sum (of the balance in this “pot” at retirement date) and the remaining balance is transferred to the Retirement Component to be utilised to provide for a monthly pension (annuitised). Once you have reached NRA, no cash withdrawals are allowed and you must annuitise the minimum two-thirds value, even if you elect to transfer your retirement savings to another approved fund.
Any lump sum elected at retirement from this component is taxed in terms of the Retirement Lump Sum tax table meaning that the first R550,000 may be tax-free.
SAVINGS COMPONENT
The balance in this “pot” on retirement can be withdrawn as a lump sum or be moved to the Retirement Component to increase the amount available to provide for a monthly pension. The amount taken in cash from the Savings Component on retirement will be taxed using the Retirement Lump Sum tax table.
In simple terms, the lump sum amount selected from the Vested Component and the lump sum amount selected from the Savings Component are added together at retirement, to determine the tax payable in terms of the Retirement Lump Sum tax table.
RETIREMENT COMPONENT
The full amount available at retirement in this “pot” must be utilised to provide for a monthly pension. Your monthly pension will, therefore, be based on the capital value available in the Retirement Component, plus a minimum two-thirds of the capital value available in the Vested Component (the amount after a maximum one-third lump sum has been selected), plus any amount available in the Savings Component (any balance not withdrawn).
HOW WILL MY SAVINGS
in The Various Components
Be invested?
Each component will be invested per the Sentinel Life Stage Model or your selected Member Investment Choice portfolios with investment growth being allocated to each component accordingly. Investment options will not apply to individual components but rather to your retirement savings across all components.
Important Two-Pot
System Considerations
-
Withdrawals
From The Savings
Component -
Divorce Claims
& Housing Loan
Guarantees
WILL TAKING A WITHDRAWAL FROM THE SAVINGS COMPONENT IMPACT MY RETIREMENT BENEFITS?
The option to take an annual cash withdrawal from the Savings Component, or withdrawing from the Vested Component when you leave the service of your employer, may seem attractive. However, your responsibility to provide sufficiently for your retirement will be negatively impacted should you make the wrong decision. Accessing your retirement savings early should only be considered as a last resort!
Withdrawing from these savings, even relatively small amounts, will negatively impact you financially, as it will undermine the compounding effect of long-term savings. Withdrawing from the Savings Component will result in you paying higher tax on the amounts withdrawn, and your future retirement provision will be reduced resulting in a lower pension income when you do retire.
HOW WILL THE TWO-POT SYSTEM IMPACT DIVORCE CLAIMS & HOUSING LOAN GUARANTEES?
Divorce
The ex-spouse (non-member spouse) remains entitled to a portion of the member’s Pension Interest, as determined by a valid and enforceable divorce order. Pension Interest will comprise the combined value in the Vested, Savings, and Retirement Components of the specific member. A member is still allowed to withdraw from the Savings Component once a divorce claim has been processed if there is sufficient capital available in this component.
Housing Loan Guarantees
The amount available for a housing loan guarantee is based on the combined value of all three components. The Fund Rules specify that a maximum of 50% of this combined value may be guaranteed. Where a deduction is required to settle a housing loan for which the Fund has provided a guarantee, this deduction will be taken proportionately from each component.
If a housing loan guarantee was provided before a valid divorce or maintenance order was issued, then the amount available for the divorce or maintenance court order is based on the amount remaining after the housing loan guarantee has been taken into account.
HOW DO I APPLY FOR A TWO-POT WITHDRAWAL?
Applicable application forms will be available on the Fund’s website after the Two-Pot system legislation has been finalised and any changes have been considered and taken into account.
