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By Maria Smit*
The retirement landscape will significantly transform next year by implementing the two-pot retirement system. Designed to provide greater flexibility and financial security for individuals, this is a contentious move that everyone still does not fully understand.
In a nutshell, from 1 March 2024 retirement funds will be divided into two distinct pots, each serving a specific purpose. Members will contribute one-third of their savings to an ‘access pot’, while the remaining two-thirds will be allocated to the ‘retirement pot’, which you can’t touch until retirement.
Why the changes?
These are quite dramatic changes from the previous retirement regime in which your retirement savings were locked up until retirement. You could withdraw one-third of these savings when you retire – subject to tax, of course – while the remainder would go into an annuity that pays you a monthly income.
The two-pot system is a response by the government to offer some respite to households who suffer a financial catastrophe, as happened to thousands during the COVID pandemic. Essentially, the funds in your access pot can be withdrawn to deal with emergencies rather than taking on debt.
You may withdraw as much as is available in your access pot, with a minimum withdrawal of R2,000.
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How the two-pot system will work
From 2024, your retirement fund contributions – including pension preservation funds, provident funds, provident preservation funds and retirement annuities (RAs) – will be split between the access and retirement funds pots. One-third of your contributions will flow to the access pot and the remainder into your retirement pot.
All your retirement savings accumulated before this date will remain untouched, although you will have 10% of your previous savings, up to a maximum of R25,000, transferred to your access pot. This means you won’t have to wait for the balance to grow before the access pot money is worth using.
The question you’ll need to ask yourself if whether withdrawing funds from your access pot is a wise move. That is a decision only you can make and will be dictated to by your circumstances.
There is agreement in some circles that access to saved funds will help families in immediate distress, however, one must always consider the long-term implications. Saving for retirement is one of the longest-term financial plans you’ll need to consider, and for a good reason: only by saving over a long period can you build up funds to see you through your retirement years.
The fear for people like me is that investors will see the access pot as easy money for impulse purchases rather than a real need. So, my advice is to consider this very carefully and speak to a financial advisor who can help you navigate difficult times. You might have other options available that you haven’t considered.
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What if you’re over 55?
These decisions are a little easier if you’re over 55, the youngest age you’re officially allowed to access your retirement savings.
Under the two-pot retirement system, you have the choice if you’re over 55 to participate in this new arrangement or continue under the previous system’s rules.
These decisions are significant when you’re this close to retirement. For many, these are your most financially productive years as you reap the rewards of your experience. And typically, many of your financial obligations, like child-rearing and mortgages, could be behind you.Â
If you’re in this position, you might not need an instant-access pot because your large financial obligations are handled.
I expect a lot more debate about the two-pot system in the months leading up to this massive change to retirement legislation. Especially as all the final details have not yet been clarified by National Treasury as it awaits public commentary on its proposals. The closing date for comments is 15 July 2023.
- Maria Smit CFP® professional is an advisor at Brenthurst Pretoria [email protected].
