Questions most asked about the two-pot retirement system
Maria Smit
We know you have been bombarded with the articles about new two pot retirement system.
Many people have already started with withdrawals while others have questions. These are their concerns:
What happens to the money saved in retirement products before 1 September 2024?
Effectively there are three pots:
- Savings Pot (From 1 September 2024, the savings component will receive one-third of all contributions.)
- Retirement Pot (Receives two-thirds of contributions from 1 September and must be preserved until retirement.)
- Vested Pot (Holds all accumulated retirement savings up until 31 August 2024. It will be reduced with a once-off seeding to the savings component on 1 September 2024.)
Everything saved before 1 September 2024 will go into your Vested pot. And the old rules apply.
What are the old Rules applicable to the Vested Pot?
For Pension / Preservation Pension Funds:
At retirement, a preservation pension and pension fund allow for the maximum of a one-third “lump sum” withdrawal.
The remaining fund value must be used to purchase an income producing annuity (Guaranteed Life / Living annuity).
For a Provident fund:
At retirement, the full value may be paid out to the investor as a lump sum withdrawal all subject to taxation.
Alternatively, the entire amount can be used to purchase an income producing annuity (Guaranteed Life / Living annuity).
Taxation at retirement (from the fund):
When the investor officially retires from these retirement products (which they may choose to do at any time after the age of 55) a maximum of one-third of the value may be taken as a cash lump sum while the balance must be transferred to purchase an annuity to provide the investor with an income.
The cash portion at retirement/retrenchment will be subject to the following tax table:
| RETIREMENT FUND LUMP SUM BENEFITS OR SEVERANCE BENEFITS | |
|---|---|
| TAXABLE INCOME | TAX |
| R0 – R550 000 | 0% of taxable income |
| R550 001 – R770 000 | 18% of taxable income above R550 000 |
| R770 001 – R1 155 000 | R39 600 + 27% of taxable income above R770 000 |
| R1 155 001 and above | R143 550 + 36% pf taxable income above R1 155 000 |
IMPORTANT: The VESTED POT will also give a one-time seeding amount, which will be the lesser of 10% of the vested component’s value or R30,000.
What are the new rules applicable to Savings and Retirement Pot?
Every monthly saving you make from now on will be split into 2: One Third into a savings pot and two thirds into the retirement pot.
Savings Pot:
You can make withdrawals from the savings component of your retirement fund under certain conditions. Remember, you should only make a withdrawal for a financial emergency.
- You need a balance of at least R2,500 in your savings component to make a withdrawal.
- Withdrawals from the savings component are allowed once per tax year. Withdrawals are added to your taxable income and will be taxed at your marginal tax rate at the time of withdrawal.
- WARNING: As this is only for emergencies government did put in a hurdle to deter you from withdrawing and that is you will pay taxes on this withdrawal. If, for example, you request to withdraw R25,000 (after a transaction charge) and your marginal tax rate is 30%, the tax amount will be R7,500. This amount will be deducted from the R25,000 before it is paid into your bank account.
Retirement Pot:
At retirement this must be used to purchase an income producing annuity (Guaranteed Life / Living annuity).
What if I don’t withdraw funds from my savings pot until retirement?
If you choose not to withdraw from your savings pot, the remaining funds will be taxed as a lump sum benefit upon retirement, following the retirement lump sum tax table.
These tax rates are generally lower than the marginal tax rates applied to withdrawals before retirement.
What happens if I have no Savings Pot left at retirement?
You will then just have your retirement pot and that must be used to purchase an Income Producing annuity. This means you have no liquidity option at retirement.
What will my options be when I resign from my Employer:
In the past you could withdraw your entire pension fund when you resign.
Now you will only be able to access your Vested Pot and your savings pot.
The rest would be transferred to a preservation fund, and you can only access it at retirement.
Vested Pot withdrawal at resignation will be taxed according to the withdrawal tax tables:
Should you wish to make a withdrawal prior to the age of 55, you may do so during resignation and once after the preservation fund was set up.
Taxation prior to retirement (from the fund):
Prior to retirement, no income tax, capital gains tax or dividend withholding tax is levied within the fund.
This serves as another incentive to make use of this product in order to save towards your retirement.
| RETIREMENT FUND LUMP SUM WITHDRAWAL BENEFITS | |
|---|---|
| TAXABLE INCOME | TAX |
| R0 – R27 500 | 0% of taxable income |
| R27 501 – R726 000 | 18% of taxable income above R27 500 |
| R726 001 – R1 089 000 | R125 730 + 27% of taxable income above R726 000 |
| R1 089 001 and above | R223 740 + 36% of taxable income above R1 089 000 |
Savings Pot:
You can make withdrawals from the savings component of your retirement fund, but you will be taxed according to your income tax tables.
I am a member of the GEPF. Do these new rules affect me?
The two-pot system also covers all defined benefit funds, including the Government Employees Pension Fund (GEPF). However, the calculation methods for the GEPF’s two pots may vary due to its defined benefit nature.
Contributions to the savings and retirement pots are allocated based on the member’s pensionable service.
I am already 55. Do these new rules apply to me?
The two-pot retirement system applies to all retirement funds, except legacy annuity policies or inactive funds.
Pensioners and provident fund members that were aged 55 and over on 1 March 2021 will not be included in the two-pot system by default but can elect to participate should they wish to.
We are still just starting with this new legislation, and we understand that this is all tricky. If you have any queries, please contact an experienced, qualified advisor.
Maria Smit, CFP® is a financial advisor at Brenthurst Wealth Pretoria [email protected]
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