Good news for South African retirement funds – and a warning

South Africa’s new two-pot retirement system will kick in on 1 March 2025 and could improve members’ retirement outcomes by 2 to 2.5 times compared to the current system.

National Treasury and the South African Revenue Service (SARS) recently provided important feedback on the country’s new two-pot retirement system at the recent sitting of the Standing Committee on Finance.

This new system will implement a “two-pot” system that will allow pension and provident fund members and retirement annuity policyholders to access a portion of their savings before retirement age without resigning.

Webber Wentzel partner Joon Chong explained that the new system would create two “pots” for retirement fund members: A “savings” pot and a “retirement” pot.

One-third of fund members’ contributions after 1 March 2024 will be allocated to a “savings” pot from which withdrawals can be made once a year. The other two-thirds will go into a “retirement” pot.

While the final legislation has yet to be issued, and parliamentary approval is still required, the following announcements and clarifications were made –

  • The new proposed effective date for the two-pot system is 1 March 2025.
  • The new proposal for seed capital is 10% of a member’s retirement savings value on 28 February 2025 and is limited to a maximum of R30,000. The seed capital reduces a member’s vested component and is transferred to the savings component as the starting balance.
  • Cash lump sum withdrawals from the savings component after 1 March 2025, including seed capital, will be taxed at members’ marginal rates should it be withdrawn before retirement. 
  • National Treasury proposed the implementation of a withholding tax process rather than a tax directive process for savings withdrawal claims. Should this be approved, SARS will provide guidance on the correct tax rate to the fund administrator for the tax deduction from a savings withdrawal claim.
  • Provident fund members who were 55 years or older on 1 March 2021 will be able to opt into the two-pot system. In other words, the two-pot system will not automatically apply to these members, as they will have a choice.

According to Alexforbes’ head of best practice, Vickie Lange, certain Parliamentary committee members raised concerns regarding the delayed implementation date and the maximum seed capital being increased to R30,000.

These members requested that this amount should be increased to R40,000. This is still subject to 10% of the member’s savings value on 28 February 2025.

SARS Commissioner Edward Kieswetter

Lange said the two-pot system is the latest milestone in the retirement reforms that have taken place over the last decade. 

“This new system is exciting and will significantly enhance our retirement system. Alexforbes anticipates that the implementation of this system will improve retirement outcomes for members,” she said.

“The two-pot system will increase retirement savings over the longer term and will assist members in managing their more urgent financial needs.” 

“Based on certain assumptions, the two-pot system will improve members’ retirement outcomes by 2 to 2.5 times compared to the current system.”

However, she warned that the higher limitation on seed capital may result in higher withdrawal amounts from retirement funds.

She said this may result – on average – in an asset outflow impact of 1% to 2% and higher claims volumes for retirement funds. 

“This will mainly be driven by financial distress and higher indebtedness amongst fund members of South African retirement funds,” she said. 

“Should this transpire, it will significantly impact fund administrators as they will have to process large claim volumes in a limited time. Further, this will ultimately result in lower retirement incomes for members upon retirement.”

She encouraged fund members to keep all their retirement savings invested for retirement since withdrawing cash from retirement savings has a significant financial impact that could include:

  • Paying tax on any withdrawn amount
  • Reducing the retirement income members will receive upon retirement
  • Reducing the cash amount available to members at retirement

“For these reasons, fund members must save for emergencies separately instead of relying on their savings component,” she said. 

“Many investment options are available which will help fund members save for emergencies; these include money market accounts, which pay interest on savings and provide members access to cash as and when they need it”. 

“The savings component of the two-pot system should be a last resort once other options have been exhausted.”


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