Danie Hattingh | Spokesperson | Business | Building Industry Bargaining Council (BIBC) | mail me |

With the 1 September implementation deadline looming, South Africa’s ‘two-pot’ retirement reform is fast coming to the boil.

While President Cyril Ramaphosa signed the new Pension Funds Amendment Bill, for many employers and labourers there remains much uncertainty. This has prompted us to offer a clear explanation of why this legislation has been drafted but, more importantly, how it will affect employers and employees directly.

What you need to know about the two-pot system

The two-pot retirement system essentially aims to empower more South Africans to preserve their retirement savings when they leave a job or change employment, while enabling controlled access to these savings in times of financial hardship. It is largely a governmental measure aimed at preventing a repeat of the situation that arose during the COVID-19 pandemic, when retrenched citizens did not have emergency funds to fall back on.

The system applies to any South African in possession of a pension fund, provident fund, retirement annuity or preservation fund and divides members’ benefits into two separate pots – a savings pot and a retirement pot.

One-third of contributions will go into the savings pot, which can be accessed once a tax year if needed. If you decide to make a withdrawal from your savings pot, you may withdraw everything in your savings pot as there is no cap on the maximum amount that you can withdraw. However, the minimum amount that can be withdrawn is set at R2,000 a year.

The retirement pot is an entirely different story

When the system is implemented on 1 September, two-thirds of retirement fund contributions will be allocated to a worker’s retirement pot and must be preserved to buy a pension or annuity at retirement. This money cannot be withdrawn, even if leaving a job or retirement fund.

There are both short- and long-term considerations. In the short-term, retirement fund members will be able to withdraw a small portion of their existing savings immediately once the system is implemented. This is commonly referred to as “seed capital”.

Seed funding (10% of vested component to a maximum of R30,000) will be accessible from 1 September. Members should be aware of tax implications, including potential changes to marginal tax rates, and the impact on future compound interest and overall retirement savings by withdrawing seed funding.

The seed capital will be limited to 10% of the amount in your retirement fund account on 31 August 2024, subject to a maximum amount of R30,000. For you to have access to a withdrawal benefit of R30,000, the value of your retirement fund account on 31 August 2024 needs to be at least R300,000.

When it comes to the longer term, as it is compulsory to preserve the retirement component on changing jobs, it is important to manage the transfer of this value and keep track of preserved values.

Ensuring as seamless a transition a possible to the new system

The two-pot system is beneficial in that it will allow individuals to access a portion of their retirement savings during times of financial hardship. Conversely, accessing even a portion of one’s retirement savings upfront can undermine one’s eventual financial security upon retirement.

We have drawn up a list of considerations for both employers and workers to ensure as seamless a transition a possible to the new system:

Employers

• Ensure updated employee details/ information.
• Ensure HR and payroll staff are well informed with how the two-pot system works.
• Keep employees informed of developments.

Workers

• Ensure information is updated with the employer – first name and surname (as per home affairs), ID/ passport number, cell number, tax number (as per the South African Revenue Service (SARS)).
• Any withdrawals will require a tax directive from SARS. In the case of any outstanding debt to SARS, SARS will issue a notice to pay this debt from the withdrawal amount first before any funds are paid to the withdrawer.
• Stay informed – read all communication issued by the employer and/or fund administrator.
• Consider options carefully – consult with a financial advisor if needed.
• Members will be taxed at marginal tax rates on withdrawals made from the savings pot.
  The retirement fund or its administrator will apply for a tax directive from SARS and deduct the tax before paying the benefit.

Further information can be found here.

Related FAQs: Two-pot retirement system

Q: What is the proposed two-pot retirement system?

A: The proposed two-pot retirement system is a new retirement savings framework that allows members to separate their retirement savings into two distinct pots: one for immediate access before retirement and another for long-term savings meant for retirement benefits.

Q: When is the implementation date for the two-pot retirement system?

A: The implementation date for the two-pot retirement system is set for 1 September 2024, allowing members to begin utilising the new system from that date.

Q: How can members withdraw from their savings in the two-pot system?

A: Members can withdraw from their savings pot of the two-pot retirement system, which is designed to offer access to their retirement savings under specific conditions, providing flexibility in retirement planning.

Q: Will withdrawals from the savings pot be taxed?

A: Yes, any withdrawal from the savings pot of the two-pot retirement system will be taxed according to the applicable tax table and members must be aware of the tax implications when planning their withdrawals.

Q: What are the contributions to retirement funds under the new two-pot system?

A: Under the new two-pot retirement system, members must continue making contributions to their retirement funds, which will be allocated to both the savings component and the long-term retirement benefit pot.

Q: Can members access their retirement savings before reaching retirement age?

A: Yes, the two-pot system allows members to access a portion of their retirement savings before reaching retirement age, providing an opportunity for financial flexibility during their working years.

Q: What are the practical implications of withdrawing from the savings pot?

A: The practical implications of withdrawing from the savings pot include potential tax liabilities, changes in retirement planning and the necessity for members to be informed about how their withdrawals will affect their long-term retirement benefits.

Q: How does the two-pot system impact existing retirement arrangements?

A: The implementation of the two-pot retirement system may affect existing retirement arrangements by introducing new rules for withdrawals and contributions, thus requiring members to reassess their retirement planning strategies.

Q: What should members know about the two-pot retirement system?

A: Members should know that the two-pot retirement system is designed to enhance access to retirement savings while balancing the need for long-term financial security, and they should familiarise themselves with the rules governing contributions, withdrawals, and taxation.