The two-pot retirement system, which took effect in South Africa on 1 September 2024 in terms of the Revenue Laws Amendment Act 12 of 2024, aims to strike a balance between giving members early access to their retirement funds for emergencies, and maximising retirement fund growth over the long term.
The system was implemented to minimise the number of fund members who resign from their employment prior to retirement age in order to have access to their retirement funds early. The two-pot system now gives members access to a savings component of their fund, which may be accessed for emergencies.
Retirement rules before the implementation of the two-pot system
Prior to the implementation of the two-pot system, retirement fund members were not able to access their funds until they had reached the earliest age of retirement, being 55 years. Early access to funds would only be granted if the value of the annuity was less than R15,000.00, or if the member was emigrating or getting divorced.
In the case of pension funds or provident funds, the member was only allowed to access funds when the employer-employee relationship was terminated. At retirement, the member could withdraw a maximum one-third of the annuity in cash and use the balance to purchase an annuity (pension funds) or withdraw the full amount (provident funds).
Due to certain amendments to the Income Tax Act effective from March 2021, member contributions and any growth thereon were deemed to be non-vested benefits and would be annuitised. Any benefits accumulated until then were regarded as vested benefits and the old rules applied. However, any existing provident fund members who had already reached the age of 55 by 1 March 2021 were exempt and their rights remained vested.
How does the two-pot system work?
As of 1 September 2024, the two-pot system structures retirement funds as follows:
- Vested component: all retirement savings in your retirement fund up and until 1 September 2024 make up the vested component. The two-pot rules are not applicable to this component.
- Savings component: made up of ‘seeding capital’, which is 10% of the vested component, capped at a maximum of R30,000, as well as one-third of all future contributions from 1 September 2024. This is the component that may be drawn from.
- Retirement component: made up of two-thirds of all future contributions from 1 September 2024. This component only matures on retirement.
Vested component: retirement savings up and until 31 August 2024
The vested component comprises the retirement savings of the member up and until the day before the two-pot system was implemented. These funds remain subject to the old retirement fund rules, hence are not affected by the two-pot rules.
When a member resigns from their employment and they have a vested component, they may either stay a paid-up member of the fund, withdraw the funds in cash, or transfer the monies to another fund.
When a member retires, they may still choose to withdraw a lump sum of their vested component and these monies will be taxed at the retirement lump sum tax tables. In other words, the first R550,000.00 withdrawn by the member is tax-free. The remaining funds in the vested component must be used to buy a living annuity.
As of 1 September 2024, the vested component will continue to grow with investment returns, but no portion of the member’s contributions will be allocated thereto.
Savings component: one-third of contributions
On 31 August 2024, each member’s ‘seeding capital’ was transferred into their savings component from their vested component. The seeding capital is made up of either 10% of the total retirement savings or R30,000.00, whichever amount is less. This transfer was compulsory. Thereafter, from 1 September 2024, one-third of the member’s fund contributions will be allocated to the member’s savings component.
This savings component may be accessed once per annum in the case of emergencies. However, the minimum withdrawal amount is R2,000.00, and withdrawals will be taxed at the individual member’s marginal tax rate.
Members should also be weary that the legislative amendments make provision for the charging of an administration fee for withdrawals. Hence, it may become costly to withdraw from the savings component.
Retirement component: two-thirds of contributions
From 1 September 2024, two-thirds of each member’s contributions will be allocated to their retirement component. These funds cannot be accessed prior to retirement. This change is aimed at preserving wealth for members. Upon retirement, the funds in the retirement component must be utilised to buy a living annuity.
Members are also no longer able to access these funds upon terminating their employer-employee relationship. Upon resignation, these funds will remain invested until their eventual retirement.
Monies may be transferred from the vested component or savings component into the retirement component. Once these funds have been transferred into the retirement component, they may not be transferred back into the savings or vested components.
Tax implications of the two-pot system
Members should be acutely aware of the tax implications for the new two-pot system. When members withdraw funds from their savings component, these funds are subject to administration fees, as well as Pay As You Earn (PAYE) at the member’s marginal rate. Further, any outstanding taxes or penalties owed to SARS may be levied against the funds that are withdrawn. Therefore, there is a strong emphasis placed on only withdrawing monies from the savings component in the event of an emergency.
Withdrawals from the savings account are taxed at the member’s marginal tax rate for each and every withdrawal. However, the exception is where the savings component funds are withdrawn upon retirement. When these funds are withdrawn on retirement, the retirement tax tables apply, and the first R550,000.00 may be withdrawn free of tax.
Striking a balance: preservation of funds versus emergency relief
Members should be cautious of withdrawing from the savings component of their retirement funds and are urged to only withdraw funds in the case of financial distress or emergencies. Withdrawals will be taxed and it is likely that an administrative fee will also be charged. When withdrawing at retirement, these funds are subject to retirement tax tables, thus increasing one’s standard of living at retirement.
Disclaimer
The articles on these web pages are provided for general information purposes only. Whilst care has been taken to ensure accuracy, the content provided is not intended to stand alone as legal advice. Always consult a suitably qualified attorney on any specific legal problem or matter.