The “two-pot” retirement system explained
The “two-pot” retirement system was first introduced by Finance Minister Enoch Godongwana in his budget speech in February 2022. After National Treasury drafted the Revenue Laws Amendment Bill, the framework of the “two-pot system” was established. Its purpose is to allow financially constrained members of retirement funds to access a portion of their retirement capital while preserving the remainder until retirement. However, the legislative adjustments have not been finalised, and some benefits may be subject to change.
Industry concern stems from the possibility that ill-informed members of retirement funds might opt to retire or resign from their current fund or occupation to access their retirement capital early.
The “two-pot system” includes pension funds, provident funds, retirement annuities, preservation funds, and defined benefit retirement funds. Legacy retirement annuities that meet specific criteria in the draft legislation will be exempt from the “two-pot system.”
Starting from 1 September 2024, one-third of contributions will be allocated to a “savings component,” and two-thirds to a “retirement component.” A third component, the “vested component,” will include accumulated retirement savings up to 31 August 2024.
The key features of the “two-pot system” are the contributions to retirement products and the availability of capital in the “savings component” compared to the “retirement component,” focusing on the time and method of access, as well as the tax treatment of withdrawals.
The “savings component” will receive a one-time boost from accumulated retirement savings up to 31 August 2024, with the advance being the lesser of 10% or R30,000. This amount will be accessible after the “two-pot system” is implemented; a process known as “seeding.”
Capital in the “savings component” can be accessed at any time during a tax year, limited to one withdrawal exceeding R2,000. There is no limit on the amount that can be withdrawn. Withdrawals from the “savings component” will be added to an individual’s gross income and taxed accordingly, potentially moving the taxpayer into a higher tax bracket. This is intended to discourage early withdrawals, a measure whose effectiveness will be evaluated after 31 August 2024.
Members of provident funds older than 55 on 1 March 2021 (“T-Day”) are not required to participate in the “two-pot system” and will automatically be exempt. Future contributions from these members who choose not to participate will continue to accumulate in the “vested component,” with existing legislation and tax rules applying to these benefits.
Members younger than 55 on “T-Day” will be subject to the rules of the “two-pot system.” Thus, their future contributions to the “savings component” and its growth will be accessible once per tax year, while two-thirds of contributions to the “retirement component,” and its growth, will only be accessible at retirement. Access to the “retirement component” is limited to an annuity income, except under certain conditions:
- If the member ceased to be a South African tax resident for more than three years.
- If the member left South Africa on expiry of a work or visit visa, and
- If the amount of the member’s retirement and vested components are less than the prescribed legislation at the time (currently R247500).
The advantages and disadvantages of the “two-pot system” will vary for each retirement fund member. Immediate access to capital in the “savings component” could provide necessary relief in emergencies, while compulsory preservation and forced annuitisation of the “retirement component” offer clear benefits.
Irresponsible management of your retirement fund could have significant implications for your quality of life after retirement. It is advisable to consult a financial adviser to understand the consequences of any actions regarding your retirement.
Written by Dawie van Heerden (Director / Wealth Manager)
dawiev@bvsa.ltd
