Two-pot retirement system
The new two-pot retirement system will become effective on 1 September 2024. This page presents the latest information on the changes and how they will impact you.
How will it work?
All future contributions to retirement funds will be split as follows: One-third will be credited to a savings component and two-thirds to a retirement component. Together, these components will make up your retirement fund account.
The savings component will allow for one withdrawal of at least R2 000 per tax year (1 March to end February) before retirement. At retirement, any remaining balance can be taken as cash or used to purchase an annuity.
The retirement component will be preserved until retirement. At that point, it must be used to purchase a retirement income-providing product, such as a living annuity or a guaranteed life annuity.
While future contributions will be allocated to different components, the components still form one retirement fund account that should be viewed holistically.
How will the new system impact you?
Not all retirement fund members will be impacted in the same way. Click on the relevant block below to learn more about how you will be impacted.
As an existing Allan Gray retirement fund member, you will have up to three main components in your retirement fund account as shown below:
The vested component of your account consists of your existing savings at the implementation date – being your two-pot vested benefit and your harmonisation vested benefit (if applicable) – plus future growth thereon. No further contributions can be made to your vested component. Your existing rights will continue to apply to your vested component, i.e. your vested component will not be impacted by two-pot.
Two-thirds of all new contributions from the implementation of the two-pot system will be credited to the retirement component. For example, if you contribute R3 000 per month to your Allan Gray retirement fund, R2 000 will be credited to your retirement component.
The full amount in your retirement component must be preserved until retirement. At retirement, the full amount in this component must be used to purchase a retirement income-providing product, such as a living annuity or a guaranteed life annuity. This means you will not be able to withdraw a cash lump sum from your retirement component, either before or at retirement, unless the de minimis rule applies.
On the implementation date, the savings component will be seeded with an initial amount transferred from the vested component of your account. Thereafter, one-third of all new contributions will be credited to the savings component.
Prior to retirement, you will be allowed to make one withdrawal per tax year of at least R2 000 from your savings component. It is important to understand the long-term implications of accessing your retirement savings early.
At retirement, any remaining balance in this component can be taken as cash or used to purchase a retirement income-providing product, such as a living annuity or a guaranteed life annuity.
Seeding refers to the initial, once-off funding of your savings component. It will be funded from the vested component of your account and you cannot choose not to have your savings component seeded. Even though seeding is compulsory, there is no requirement to withdraw this amount. Seeding has no immediate financial consequences, but there are consequences for withdrawing from your retirement savings.
The amount to be seeded will be 10% of the market value of your account on the day before the implementation date of the two-pot system, subject to a maximum of R30 000. For example, if you have R100 000 in your Allan Gray retirement fund account on the day before the implementation date, R10 000 will be credited to your savings component from your vested component.
While the two-pot system allows you to access a portion of your retirement savings, it is important to preserve as much of your savings as possible until retirement so that you can maximise the benefits of compounding and retire comfortably. Your savings component should therefore not be viewed as a short-term savings vehicle – it is still part of your retirement fund account, i.e. a long-term investment intended to provide for your retirement.
The savings component of your retirement fund account will be seeded when the two-pot system is implemented. Thereafter, one-third of your future contributions will be credited to your savings component. You can make one withdrawal of at least R2 000 per tax year from the amount in your savings component.
Withdrawals from your savings component before retirement are taxed according to your marginal tax rate. It is important to remember that accessing your savings component before retirement will reduce the amount you will have available to withdraw as a cash lump sum or purchase an annuity at retirement. You should therefore avoid withdrawing before retirement to maximise your options at retirement.
Choosing not to withdraw from the savings component of your retirement fund account within any specific period before retirement has no negative implications, as you do not lose your right to withdraw from this component.
You will not be able to withdraw from your retirement component under any circumstances, including if you resign from employment or if you encounter financial difficulty, unless you cease to be a South African tax resident.
Pre-retirement withdrawals from your vested component will continue to be governed by existing fund rules. For example, if you are invested in a retirement annuity fund, you will not have access to the vested component of your investment until you reach the stipulated retirement age, even if you choose to resign.
It is important to view your retirement fund account holistically when making decisions, even though there may be different rules attached to the different components making up your account.
At retirement, you will have the option to access the remaining balance of your savings component (or a portion of it) in cash, even if you have already taken a withdrawal during the same tax year. Cash withdrawals at retirement will be taxed according to the retirement fund lump sum tax table, as they are today . You can also choose to use some or all of the funds to purchase a living annuity or a guaranteed life annuity.
The full value of your retirement component must be used to purchase an annuity, unless the de minimis rule applies.
If you have a two-pot vested benefit, you will only be able to take one-third of this benefit in cash, and the remaining two-thirds must be used to purchase a retirement income-providing product, such as a living annuity or a guaranteed life annuity. If you also have a harmonisation vested benefit, you will have the option to withdraw 100% of this benefit in cash. These withdrawals are taxed.
Dipping into your retirement savings robs you of the full benefit of compounding. Accessing any part of your savings component before retirement will reduce the amount you will have available at retirement to purchase an income-providing product or to take as a cash lump sum. You will also lose out on the favourable tax treatment of taking a cash lump sum at retirement compared to making withdrawals before retirement.
For example, withdrawing R30 000 from your savings component on the implementation date of the two-pot system could reduce the value of your retirement savings at retirement by R130 000 in today’s money terms. Therefore, you should only consider withdrawing from your savings component under exceptional circumstances and as a last resort.
The tax treatment of contributions to retirement funds will not change following the implementation of the two-pot system. Contributions to a retirement fund are tax-deductible up to 27.5% of the greater of taxable income or remuneration (excluding any retirement fund lump sum, withdrawal and/or severance benefits) per tax year, subject to a maximum of R350 000 per tax year. Any contributions above the maximum amount will be carried forward to the next tax year.
If you decide to withdraw from your savings component before you retire, the withdrawal will be taxed at your marginal tax rate.
When we receive your withdrawal instruction, we will apply for a tax directive from the South African Revenue Service (SARS). The tax directive will indicate the amount of tax that must be withheld from the withdrawal and paid to SARS. SARS may also include a deduction order (IT88) if you have any outstanding taxes, which we will need to apply to your withdrawal. We will then pay the after-tax amount to you.
These withdrawals will not reduce the tax-free withdrawal allowance available to you at retirement.
Any allowable pre-retirement withdrawals from your vested component will continue to be taxed according to the current regime, i.e. according to the retirement fund withdrawal tax table.
At retirement, you will have different options for the different components of your retirement fund account.
You will be able to withdraw the full amount available in your savings component. This withdrawal will be taxed according to the retirement fund lump sum tax table, as it is today. Alternatively, you can transfer a portion or the entire amount to an annuity.
The full value of your retirement component must be used to purchase an annuity at retirement, unless the de minimis rule applies.
Any allowable withdrawals at retirement from your vested component will continue to be taxed according to the current regime, i.e. the retirement fund lump sum tax table.
You will be able to withdraw from your savings component, provided you have not already taken your one withdrawal permitted in a given tax year.
You will not be able to withdraw from your retirement component.
The rules that currently apply when you resign will continue to apply to your vested component. For example, if you are a member of a pension or provident fund, you will be able to access 100% of your investment when you resign, subject to specific fund rules. These withdrawals are taxed according to the retirement fund withdrawal tax table.
If you transfer your investment to another retirement fund provider, all existing components in your investment (and their rights) will be retained upon transfer.
You will also be allowed to transfer between components within the same investment as follows:
- Transfer from your vested component to your retirement component
- Transfer from your savings component to your retirement component
These are one-way transfers, and you will not be able to undo the transfer if you require access to your retirement savings.
While the two-pot system will provide you with access to a portion of your retirement savings in case of severe financial stress, it does not change how you should invest your retirement savings. You should view the components in your retirement fund account holistically and remain invested in funds that will offer you the best chance of having sufficient savings at retirement to provide an adequate post-retirement income.
Click here for additional insights on the changes to the retirement system.
As a new Allan Gray retirement fund member after the implementation date of the two-pot system, you will have two components in your retirement fund account, as shown below:
Two-thirds of all contributions will be credited to the retirement component. For example, if you contribute R3 000 per month to your Allan Gray retirement fund, R2 000 will be credited to your retirement component.
The full amount in your retirement component must be preserved until retirement. At retirement, the full amount in this component must be used to purchase a retirement income-providing product, such as a living annuity or a guaranteed life annuity. This means you will not be able to withdraw a cash lump sum from your retirement component, either before or at retirement, unless the de minimis rule applies.
One-third of all contributions will be credited to this component, from which you will be allowed to make one withdrawal of at least R2 000 per tax year prior to retirement. At retirement, any remaining balance in this component can be taken as cash or used to purchase a retirement income-providing product, such as a living annuity or a guaranteed life annuity.
While the two-pot system allows you to access a portion of your retirement savings, it is important to preserve as much of your savings as possible until retirement so that you can maximise the benefits of compounding and retire comfortably. Your savings component should therefore not be viewed as a short-term savings vehicle – it is still part of your retirement fund account, i.e. a long-term investment intended to provide for your retirement.
Before retirement
You can make one withdrawal of at least R2 000 per tax year from your savings component. Withdrawals from your savings component before retirement are taxed according to your marginal tax rate . It is important to remember that accessing your savings component will reduce the amount you will have available to withdraw as a cash lump sum or purchase an annuity at retirement. You should therefore avoid withdrawing before retirement to maximise your options at retirement.
Choosing not to withdraw from the savings component of your retirement fund account within any specific period before retirement has no negative implications, as you do not lose your right to withdraw from this component.
You will not be able to withdraw from your retirement component under any circumstances, including if you resign from employment or if you encounter financial difficulty, unless you cease to be a South African tax resident.
At retirement
It is important to view your retirement fund account holistically when making decisions, even though there may be different rules attached to the different components making up your account.
At retirement, you will have the option to access the remaining balance of your savings component (or a portion of it) in cash, even if you have already taken a withdrawal during the same tax year. You can also choose to use some or all the funds to purchase a living annuity or a guaranteed life annuity.
The full value of your retirement component must be used to purchase an annuity, unless the de minimis rule applies.
Dipping into your retirement savings robs you of the full benefit of compounding. Accessing any part of your savings component before retirement will reduce the amount you will have available at retirement to purchase an income-providing product or to take as a cash lump sum. You will also lose out on the favourable tax treatment of taking a cash lump sum at retirement compared to making withdrawals before retirement.
For example, withdrawing R30 000 from your savings component before retirement could reduce the value of your retirement savings at retirement by R130 000 in today’s money terms. Therefore, you should only consider withdrawing from your savings component under exceptional circumstances and as a last resort.
The tax treatment of contributions to retirement funds will not change following the implementation of the two-pot system. Contributions to a retirement fund are tax-deductible up to 27.5% of the greater of taxable income or remuneration (excluding any retirement fund lump sum, withdrawal and/or severance benefits) per tax year, subject to a maximum of R350 000 per tax year. Any contributions above the maximum amount will be carried forward to the next tax year.
If you decide to withdraw from your savings component before you retire, the withdrawal will be taxed at your marginal tax rate.
When we receive your withdrawal instruction, we will apply for a tax directive from the South African Revenue Service (SARS). The tax directive will indicate the amount of tax that must be withheld from the withdrawal and paid to SARS. SARS may also include a deduction order (IT88) if you have any outstanding taxes, which we will need to apply to your withdrawal. We will then pay the after-tax amount to you.
These withdrawals will not reduce the tax-free withdrawal allowance available to you at retirement.
At retirement, you will have different options for the different components of your retirement fund account.
You will be able to withdraw the full amount available in your savings component. These withdrawals will be taxed according to the retirement fund lump sum tax table, as they are today. Alternatively, you can transfer a portion or the entire amount to an annuity.
The full value of your retirement component must be used to purchase an annuity at retirement, unless the de minimis rule applies.
You will be able to withdraw from your savings component, provided you have not already taken your one withdrawal permitted in a given tax year.
You will not be able to withdraw from your retirement component.
If you transfer your investment to another retirement fund provider, you will need to transfer both the retirement and savings components of your account – they cannot be split.
You will also be allowed to transfer from your savings component to your retirement component within the same investment. This is a one-way transfer, and you will not be able to undo the transfer if you require access to your retirement savings.
Click here for additional insights on the changes to the retirement system.
If you have been a member of the same 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.
This means that your existing rights will continue to apply for as long as you remain a member of the same provident fund.
You will, however, be able to opt in to the two-pot system if you prefer. If you decide to opt in:
- Your existing savings plus future growth will be vested.
- Your existing rights will continue to apply to your vested savings, i.e. it will not be impacted by two-pot.
- Your future contributions, where applicable, will be subject to the rules of the two-pot system, including seeding. See the section titled I am an existing member of an Allan Gray retirement fund for more details on how your account will be treated.
If you have not opted in to the two-pot system (see the question above), your existing rights will continue to apply for as long as you remain a member of the same provident or provident preservation fund. This means that in a provident fund, you are only able to access your retirement savings before retirement if you resign. For a provident preservation fund, you are usually allowed one withdrawal prior to retirement, subject to the rules of your original fund, regardless of your employment status. These withdrawals are taxed according to the retirement fund withdrawal tax table.
When you retire from your provident or provident preservation fund, you will be able to access up to 100% of your benefit in cash. These withdrawals are taxed according to the retirement fund lump sum tax table.
Click here for additional insights on the changes to the retirement system.
Popular related content
The two-pot system simplified (updated)
By Jaya Leibowitz on 08 Jul 2024
South Africa’s retirement savings system is changing, with the implementation date of the new system currently set for 1 September 2024 – although go-live...
Part 3 (updated): The two-pot system and your savings withdrawal benefit
By Jaya Leibowitz on 08 Jul 2024
In part 3 of our Two-pot chapter, Jaya Leibowitz reminds us not to lose sight of the importance of preserving retirement savings, and cautions investors...