South Africa’s retirement shake-up coming soon

South Africa’s new two-pot retirement system allows members to access a portion of their savings for emergencies while keeping the rest locked away for retirement.

It may seem simple, but there are several things South Africans need to know about this new system before they consider making a withdrawal.

At the start of June this year, President Cyril Ramaphosa signed the Revenue Laws Amendment Bill into law, establishing the “two-pot” retirement system.

Simply put, the new two-pot retirement system changes how your retirement savings are managed – instead of one big pot, your contributions will be split into two. 

One-third goes into a more accessible savings pot you can tap into once a year for emergencies. This pot gets an initial boost from a portion of your existing savings. 

The remaining two-thirds go into a retirement pot that is locked away until you retire, ensuring you have a bigger nest egg for your golden years. This system is designed to promote long-term savings while offering some flexibility to handle unexpected situations.

The “two-pot” system, according to Institute of Retirement Funds Africa (IRFA) President Geraldine Fowler, offers retirement fund members an opportunity to think more about their retirement savings. 

“This system provides flexibility for fund members that were not available in the past. Members will now need to engage with their retirement funds more often and consider the long-term impact and the taxation of benefits,” she said.

IRFA spokesperson Wayne Hiller van Rensburg said the organisation has consistently endorsed retirement reform and the impact the establishment of the system will have in assisting members in the short term while securing future benefits. 

Fowler also said, “Members will need information and guidance to better understand their options in terms of the two-pot system and the impact of their decisions to take advantage of the legislation.”

“We are, however, waiting for the Pensions Bill and look forward to its signature, which is necessary for full clarity but not necessary for the implementation of this reform,” Hiller van Rensburg said.

The two-pot system’s implementation date is set for 1 September 2024.

Tax Attorney at Tax Consulting SA John Paul Fraser said that while experts continue to debate the merits of the two-pot system, many South Africans will start withdrawing from their savings pot under the new system from 1 September.

“We can expect to see fund administrators send out communications to their members on how savings withdrawal claims will be processed going forward,” Fraser said.

“We urge fund members to consider the practical implications relating to their withdrawals from their savings pot, most importantly the tax implications.” 

“An impulsive withdrawal without understanding the implications could lead to far more harm than the relief afforded by accessing those funds.”

Fraser provided five key considerations that fund members must be aware of before making a withdrawal.

Seed capital and withdrawal limits

On 31 August 2024, 10% of the value of your existing retirement fund, or R30,000, whichever is lower, will be allocated to your savings pot. 

This initial allocation of funds has been termed ‘seeding capital’. The seeding capital allocation is a once-off transfer at the commencement of the two-pot system and will not be repeated in the following years.

The savings pot will be accessible at any time to a fund member, with only one withdrawal permitted in a tax year. 

There is no maximum withdrawal amount set for fund members looking to withdraw from their savings pot, but it must be a minimum of R2,000.

SARS has the first right to your savings pot withdrawals

Fund members need to be aware that before any payment will be released, the fund administrator will need to apply to the South African Revenue Service for a tax directive.

If the taxpayer has an outstanding tax debt with SARS, the fund administrator will be issued with a notice to pay this debt from the withdrawal amount first and only pay the taxpayer the balance. 

Annual withdrawals are not limited to a single policy per tax year

Another dimension of the savings pot is that a fund member is allowed to make one annual withdrawal per policy. This incentivises the concept of having a more diverse policy portfolio.

An example of this scenario is where an individual contributes to three policies. The fund member would be eligible to make an annual withdrawal from each respective policy. 

“Needless to say, a fund member will be limited to the actual amount held within their savings pot at the time of withdrawal,” Fraser explained.

Tax on savings

A withdrawal from a fund member’s savings pot will be subject to tax at the fund member’s marginal tax rate. 

This means that any withdrawal will be taxed in the same manner as a salary or other similar income.

The tax on the withdrawals will be withheld by the respective fund administrator and paid directly over to SARS.

No resignation required

Fund members must be aware that the new system has limited their right to withdraw from their 2/3 retirement pot. 

Previously, fund members were permitted to access their total lump sum amount under their retirement policy upon resignation. 

The new two-pot system thus implements a lock-in of the retirement pot until a fund member reaches retirement.