Given the overwhelming amount of information available about the new two-pot retirement system, below we provide a “cheat sheet”, which includes 10 “did you knows” and an infographic, which we hope will be a useful overview for members, employers and advisers.
Did you know?
1. Two pots – but one investment
From 1 September 2024, all new contributions to retirement funds will be split into two components, as shown in the infographic below: One-third will be allocated to a savings component, which members can access once a year before retirement, and the remaining two-thirds will be allocated to a retirement component, which will be inaccessible before a member retires, and at retirement must be used to purchase a retirement income product. Existing retirement savings will go into a vested component, which will be treated in the same way as it was before 1 September 2024, except that no further contributions can be allocated to it.
While the two-pot system will offer a measure of flexibility by providing some access to savings in case of severe financial stress, it should not change how you think about or invest your retirement savings. You should view the components in your retirement account holistically and remain invested in funds that will offer you the best chance of having sufficient savings to provide an adequate post-retirement income.
2. Your savings pot will receive a once-off opening balance
Your savings component will be funded with an initial once-off amount transferred from your vested component. This process is called “seeding”. The amount to be seeded will be 10% of the market value of your account on 31 August 2024, subject to a maximum of R30 000.
3. Retirement savings accumulated before two-pot will not be subject to the new rules
The existing value of your retirement account on 31 August 2024 (your vested component plus future growth), will not be impacted by two-pot – other than the amount that will be deducted for seeding. You will not be able to make further contributions to the vested component.
4. Withdrawals could reduce your retirement savings by up to one-third
Accessing your savings component before retirement will reduce the amount you will have available at retirement to purchase a retirement income product or to take as a cash lump sum. It also robs you of the full benefit of compounding.
5. You are unlikely to get the withdrawal amount you request
Withdrawals from your savings component will be taxed at your marginal tax rate, which is the highest rate of tax that is applicable to you, according to the personal income tax table. These taxes are higher than those applied at retirement if you decide to take your savings component assets, or a portion thereof, as a cash lump sum at that point. You will receive the after-tax amount, less any outstanding taxes you may owe to SARS.
6. You may find yourself in a higher tax bracket
You could be pushed into a higher tax bracket for the year of assessment as SARS will include the withdrawal when calculating your marginal tax rate.
7. You only get one withdrawal per tax year
Even if you only make a partial withdrawal from your savings component, you are not allowed to make another withdrawal until the following tax year. Tax years run from March to February.
8. There are no penalties for not withdrawing from the savings component
The amount that is invested in your savings component remains invested and will continue to grow. The full amount, less applicable taxes, will be available to you once, annually.
9. Certain members will be excluded, but can choose to opt in
If you have been a member of a provident fund since before 1 March 2021, and you were 55 or older on that date, you will automatically be excluded from the new system, and it will not have any impact on you for this specific investment. You will, however, be able to opt in if you would like to.
10. The new rules alone do not ensure an appropriate and sustainable income in retirement
While the two-pot retirement system will assist with better preservation, it is still up to you to avoid the withdrawal temptation and invest appropriately for real returns.
