With the potential approval of required legislation, we anticipate the commencement of a transformative financial approach – the two-pot retirement system – on the 1st of March, 2024. Designed to alleviate financial strain, this novel system aspires to provide much-needed solutions to common financial dilemmas experienced by many South Africans.
Having been considered for some years, the advent of the COVID-19 pandemic illuminated the necessity for this system. It became apparent that a considerable number of individuals lacked sufficient emergency savings, and moreover, many found that their retirement savings would fall short of sustaining a comfortable post-work life. Thus, the two-pot retirement system emerges to address these concerns across all retirement fund types.
As financial professionals tasked with guiding clients through their retirement journey, it’s essential to comprehend the two-pot system’s foundation, advantages, and strategy preparation for its impending implementation.
Rationale for Overhauling the Existing Retirement System
The current retirement system restricts pension and provident fund members from accessing their benefits pre-retirement unless they resign or face dismissal or retrenchment. This arrangement occasionally pressures individuals to exit their employment merely to access their funds. This was prominently highlighted during the COVID-19 pandemic when many suffered job losses or income reductions and sought instant access to their retirement funds to mitigate financial distress.
Although accessing benefits upon job resignation provides temporary financial relief, it significantly undermines retirement savings. High tax rates imposed on retirement fund withdrawals contribute to this issue, resulting in diminished preservation of retirement savings for those who decide to withdraw their funds.
The Two-Pot Retirement System: Addressing the Existing Retirement System’s Shortcomings
The proposed two-pot system offers a potential remedy by allowing individuals to access a fraction of their retirement benefits during financial emergencies without the necessity of resigning. It also enforces compulsory preservation of retirement benefits until retirement. It is essential to understand that this plan is currently under draft legislation, open for public comment, and thus the principles are subject to modification upon finalisation of the legislation.
The two-pot system comprises three distinct ‘pots’ or ‘components’ that contribute to a member’s total retirement fund benefits: the Vested Component, the Savings Component, and the Retirement Component.
1. Vested Component
The Vested Component holds all retirement savings a member has accrued up to 29th February 2024, minus a 10% ‘seed’ value (capped at R25,000) used to initiate the member’s Savings Component from 1st March 2024. The balance goes into the Vested Component, along with the fund credits and investment returns. Current access rules apply to this component, and members can still access full pension or provident fund benefits upon employment resignation.
Both withdrawal and retirement lump sums will be taxed as per the existing tax norms.
2. Savings Component
This component contains one third of a member’s contributions (net of charges and risk premiums) from 1st March 2024 onwards. This accessible-before-retirement pot is designed to provide members with emergency fund access while still employed. It enforces a minimum annual withdrawal limit of R2,000 and includes the provision for a once-per-year withdrawal.
Amounts withdrawn pre-retirement will be added to an individual’s taxable income for that year.
3. Retirement Component
The remaining two thirds of a member’s contributions after 1st March 2024 form the Retirement Component. This component is exclusively accessible at retirement or death, promoting preservation of funds until retirement. Upon retirement, this amount is used to purchase a compulsory annuity, which is taxed at the member’s marginal tax rate.
Inclusion of Preservation and Retirement Annuity Funds
The two-pot system also extends to pension and provident preservation funds, as well as retirement annuity funds. Certain conditions allow full withdrawal from all three components, subject to the current withdrawal tax rules.
With the advent of this system, we seek to enhance our financial stability and meet our post-retirement goals more effectively. While we await the final legislation, it is crucial to familiarise ourselves with this paradigm shift in retirement planning. Together, let’s pave the way towards a more secure financial future for all South Africans.
-TN
