Wesley Davids | Executive | Governance | PPS Investments | mail me |
From 1 September 2024 South Africans with retirement funds have the option to participate in South Africa’s new two-pot retirement system.
Qualifying consumers with tax directives will be able to access approximately R100 billion in retirement savings.
The implications and benefits of the two-pot retirement system’s reform
The switch to the two-component retirement system will happen automatically except for provident fund and preservation fund members who were older than 55 on 1 March 2021, who can choose to opt in.
The financial industry and employers have undertaken comprehensive education to widen the understanding of the implications and benefits of the retirement system’s reform that will provide access to the savings pot to help consumers to pay off their debt, amongst others financial pressures.
According to South African Revenue Service (SARS), the level of household indebtedness (i.e. household debt to disposable income) averaged 63.2% from the first quarter of 2015 to the second quarter of 2023, with a spike to 75.2% during COVID-19 lockdown when disposable income decreased significantly more than debt.
Questions to consider
While the system, according to National Treasury is “meant to support long-term retirement savings while offering flexibility to help fund members in financial stress,” the questions below should be considered by anyone with a pension, provident, retirement annuity and preservation fund before withdrawing from the savings component to avoid unintended consequences to fund and receive a sustainable annuity income in retirement.
Have I saved enough to retire comfortably after 65?
Unless you are amongst the 6% of South Africans the Association of Savings of South Africa indicates can retire comfortably, the answer is likely to be no.
It is estimated that to retire comfortably in South Africa, you will need more than R7 million in savings and investments. Age should certainly play a part in your decisioning especially if you are approaching retirement as the benefits of compound investment growth become even more critical. Therefore, defining the life, you want to live in your retirement should be your guiding principle.
How can I be sure that my investment continues to grow?
While no new contributions can be made to vested components after 1 September, the vested component will continue to grow in line with investment returns on selected investment options. Investment growth earned within the savings and retirement component will remain within those respective components.
Initially, given the complexity and short timelines, some funds have opted to keep the same investment options across all components within a policy with enhancements such as differentiated investment options and strategies in the future for the various components.
I have many policies. Should I withdraw on one policy or all of them?
While you can access funds from the savings component per policy or retirement fund, consider the unintended consequences such as the tax implications and what your net payment will be after tax and long-term investment growth benefits.
What will it cost me to withdraw from my savings component vs preserving my savings until retirement?
Run the numbers before you take the decision. There are tax implications which will affect how much you receive on a withdrawal vs the more favourable tax incentive benefits from preserving your investment.
For example:
- Withdrawal: Samantha is 35 years old and has a taxable income of R700,000 per annum. She withdraws R30,000 from her savings component. She is taxed 39% and clears R18,300 as a net payment after tax.
- Preserve: Becky is 35 years old and preserves R30,000 over the 30 years until her retirement. Her investment (in a typical Balanced Fund with returns of 11% per year) will grow to R685,000. The first R500,000 is tax-free and she will be subject to an effective tax rate of 3.5%.
What are the consequences of life events on the components of my retirement funds?
- Emigration: you will be able to access the balances in both the vested and savings components on the day of emigration. The retirement component will not be accessible for three years after emigration.
- Divorce: divorce orders can currently be applied against a member’s retirement savings. This remains the same in the two component world. A claim in terms of a divorce order against any members’ retirement interest will be affected pro-rata across all the members’ components. The legal principles relating to the division of estate, does not change under the two component system. Contact your financial adviser if you are in the process of getting divorced.
- Resignation: a withdrawal on resignation is taxed at the individual’s marginal tax rate and therefore a member should consider transferring the value of their saving component into their retirement component to be annuitised for income in retirement.
- Retirement: a withdrawal at retirement is taxed according to the retirement fund lump sum benefits tax tables. Therefore, transferring the savings component into the retirement component can be annuitised for income in retirement.
Consider all the angles, discuss the implications with your financial adviser and always consider the life you want to live in retirement. Humans are living longer and need to prepare adequately for such an event.
Related FAQs: Two-pot retirement system withdrawals
Q: What is the new two-pot retirement system?
A: The new two-pot retirement system is a reform that allows for more flexible withdrawals from your retirement savings. It divides your retirement savings into two pots: one for long-term savings and another that you can access before retirement, providing better liquidity for individuals.
Q: When is the two-pot retirement system effective from?
A: The two-pot retirement system came into effect from 1 September 2024. This date marks the beginning of the new rules regarding withdrawals from your savings pot.
Q: Can I withdraw from my savings pot before retirement?
A: Yes, under the new two-pot retirement system, you can withdraw from your savings pot before retirement. The system allows you to withdraw a portion of your savings, subject to certain conditions and limits.
Q: What is the minimum withdrawal amount from the savings pot?
A: The minimum withdrawal amount from your savings pot is R2,000. This ensures that smaller withdrawals are manageable and do not create administrative burdens.
Q: How will my withdrawal be taxed?
A: Withdrawals from your savings pot will be taxed at your marginal tax rate. It’s important to consider the tax implications when planning your withdrawal amount under the two-pot retirement system.
Q: Can I withdraw all my funds from my savings pot?
A: No, you cannot withdraw all your funds from your savings pot. The two-pot system has limits in place, and you can only withdraw a maximum of R30,000 per tax year from your savings component.
Q: What happens to my contributions under the two-pot retirement system?
A: Under the new system, one-third of your contributions will go into the retirement pot, while the remaining two-thirds will be allocated to the savings pot. This structure aims to encourage long-term savings while providing access to some funds.
Q: Will I be able to purchase a retirement income product after withdrawing from my savings?
A: Yes, after making withdrawals, you can still use your remaining retirement savings to purchase a retirement income product. This allows for continued retirement planning even after accessing some of your funds.
Q: Are there any changes to the retirement annuity fund with the two-pot system?
A: Yes, the two-pot retirement system changes will also apply to your retirement annuity fund. The structure allows for greater flexibility in how you manage and withdraw from your retirement savings.