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By Charize Beukes*
The South African retirement landscape is about to change in a big way with the introduction of the new two-pot retirement system. This reform aims to strike a balance between preserving your future financial security while providing emergency access to your savings.
Whether you’re nearing retirement or just starting to save, it’s crucial to understand these changes and how they can impact your retirement strategy. Draft legislation has been published by National Treasury, with the proposed effective date of 1 September 2024. From that point on, the two-pot retirement system will be in full swing.
Let’s unpack the details so that you’re properly prepared for the future.
Three pots? Or two?
Despite its name, the two-pot system actually consists of three separate pots – if you have pre-existing retirement funds saved at the time of implementation.
This is how it works:
1. Savings Pot: One-third of your new contributions will go into this pot. You can make one withdrawal per tax year, provided it’s at least R2,000. Withdrawals are taxed at your marginal rate, and a tax directive from SARS is required. The remaining amount at retirement can be taken partially or in full, or used to buy an annuity.
2. Retirement Pot: The remaining two-thirds of your contributions will flow into this pot. This cannot be accessed before retirement and is reserved to provide an annuity in your golden years.
3. Vested Pot: This pot contains your savings made before 1 September 2024. However, you can transfer up to 10% of this pot, capped at R30,000, to the Savings Pot as starting capital. That way, you can access the Savings Pot from day one.
Will it affect me?
If you have a pension fund, provident fund, retirement annuity, or preservation fund, you will probably be affected.
If you’re over 55 and were part of a provident fund as of 1 March 2021, you have the option to stick with the old system or switch to the new one by notifying your fund administrator. Keep in mind that if you choose to opt in, that decision is final.
Why is it being implemented?
The new system aims to help South Africans retire more comfortably. It has two main goals:
1. Encourage long-term preservation of retirement assets so that you can secure your financial future in retirement.
2. Allow access to a portion of retirement savings in emergencies without needing to resign to gain access to those funds. The aim is to provide a buffer in the event of financial stress while still keeping your job.
How does this work in practice?
Let’s look at an example:
Seeding Capital: Imagine you have R200,000 in your retirement fund before 1 September 2024. You can transfer 10% of that, or R20,000, to the Savings Pot, ready for immediate use if needed.
Contributions: Suppose your contributions total R12,000 annually. R4,000 will go to your Savings Pot, and R8,000 will be directed to your Retirement Pot, securing your future.
Key takeaways
The two-pot system is designed to strike a balance between giving you access to much-needed cash in emergencies while promoting the long-term preservation of retirement savings. By offering partial access to your funds without resigning from work, it provides peace of mind in tough times.
However, it’s crucial to remember that tapping into your Savings Pot could affect your retirement plans. Withdrawals will be taxed, potentially pushing you into a higher tax bracket. Think carefully before withdrawing funds.
While the new system offers greater flexibility, ensure you speak with your financial advisor before making any decisions. An advisor can help you evaluate your options and find the best path forward for a secure retirement.
* Charize Beukes, CFP® is a financial advisor at Brenthurst Wealth Pretoria. [email protected]Â
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