Jaya Leibowitz, Senior Legal Adviser, Allan Gray

In anticipation of the new two-pot retirement system, which comes into effect in September 2024, many retirement fund members are wondering how this change in legislation will affect them and their wealth.

“The two-pot system has the potential to create good outcomes for retirement fund members; it is therefore imperative to understand the good and not-so-good about the pending regulation,” says Jaya Leibowitz, manager of Allan Gray’s retail legal team.

From September on, contributions to retirement funds will be split in two. “One-third of contributions will be put into a savings component, which can be accessed before retirement, and the remaining two-thirds will go into a retirement component, which must be preserved and used to purchase an annuity product at retirement.”

But for those who are already retirement fund members, it gets a little more complicated. For members of retirement annuity funds and pension funds, as well as members of provident funds who were under 55 years old on 1 March 2021, the value in their retirement fund on 31 August 2024 will be credited to a third component, called the vested component, which will retain all of the existing rules applicable to the relevant retirement fund before implementation of the two-pot system.

“If you are a member of a provident fund and are 55 or older on 1 March 2021, you will be excluded from the two-pot system, unless you decide to participate,” she says. For those who opt to join, their retirement fund will be split into three components in the same way as the members referred to above: existing retirement savings will be housed in a vested component, while monthly contributions will be split between the savings and the retirement components.

Why the change?

The reason behind the two-pot system is simple: to get people to save more for their retirement.

“The intention of the two-pot system is to promote the preservation of retirement wealth until members retire, while also allowing them some access to a portion of their accumulated savings during their working years,” says Leibowitz. “On retirement, their retirement funds must be used to purchase a pension-providing product.”

Seeding your savings

Once the two-pot system is implemented, members will be able to withdraw a small portion of their existing savings immediately.

“Retirement funds will take a small portion of your existing savings and credit them to your savings component in the fund, which will allow you to access a savings withdrawal benefit. This small amount is referred to as seed capital,” explains Leibowitz, “but you need to bear three things in mind before you withdraw.” These are outlined below.

1. Value limit

“The seed capital will be limited to 10% of the amount in your retirement fund on 31 August 2024, subject to a maximum amount of R30,000,” she says. For example, if you have R100,000 in your retirement fund on 31 August 2024, the seed capital will be R10,000.

2. Tax

Any withdrawals from your savings component will be taxed at your marginal income tax rate, which will depend on your taxable income for the tax year, including the withdrawal amount. “The retirement fund or its administrator, will apply for a tax directive from SARS and deduct the tax before paying you your benefit,” she explains.

3. Timing

“It is critical to understand that go-live of the system hinges on many factors, including the regulations being finalised and signed by the president, the Financial Sector Conduct Authority being able to timeously approve fund rule changes, SARS being able to issue tax directives for savings withdrawal benefits, and providers’ readiness. Withdrawals from the savings component will not be possible without the above being in place,” Leibowitz comments.

Leibowitz cautions against thinking of the savings component as a discretionary savings account. “Each time you access a savings withdrawal benefit, the amount available for your retirement income will be reduced. In addition, that withdrawal will be taxed and could push you into a higher tax bracket, depending on your income and the value of the withdrawal.”

Overall, Leibowitz is confident about the new system. “The two-pot system has the potential to create good outcomes for retirement fund members, helping those who desperately need some access, while ensuring greater levels of preservation due to the inaccessibility of the retirement component,” she concludes.

ENDS