Retirement Planning in a Two-Pot Retirement System

Published Dec 12, 2023


By Palesa Dube

AFTER much to-ing and fro-ing, it seems the legislators have agreed on an implementation date for the much-awaited Two-Pot Retirement System, now set to commence on September 1, 2024.

The implementation of this new system is a significant change to how retirement funds are structured and accessed by members going forward. It marks yet another important milestone in the ongoing retirement fund reform project started by the National Treasury more than a decade ago.

Here are some noteworthy features of how retirement funds will work under the new system:

Retirement fund contributions will be split into two, a third going into the savings pot while the rest is invested in the retirement pot.

Members can access the savings pot (one-third) of their retirement interest before reaching retirement age while preserving the remaining two-thirds for their retirement.

Both employer and employee contributions are included, and it is still possible to claim a tax deduction for these contributions, limited to the lesser of R350 000 or 27.5% of remuneration or taxable income.

The new rules apply to pension and provident funds as well as retirement annuities.

Ultimately, you will have three distinct pots instead of two: the savings pot, the retirement pot, and the vested pot, where your prior retirement interest will be ring-fenced. It's also worth noting that the legislation refers to “components” of the new system rather than “pots“, which has become the common phrase.

Savings Component

You can withdraw from this component once per tax year from each fund you’re a member of. The minimum withdrawal amount is set at R2 000, while the maximum is the total amount in the pot per tax year. Withdrawals will be taxed at your marginal tax rate.

This component will be “seeded” with a transfer from your vested component, the amount of which is capped at 10% of the total vested pot value as of August 30, 2024, with a limit of R30 000. This means that there will be funds that can be accessed immediately at the implementation date.

Tax-free transfers are permissible from this pot to your retirement pot. You can receive the balance in the savings pot upon retiring as a cash lump sum. However, any previous withdrawals from this pot will reduce your cash balance. Alternatively, you can transfer all or part of this pot to your retirement fund at retirement.

Should you pass on, your beneficiary can choose to receive the amount in this pot as a cash lump sum or opt to transfer the amount to the retirement pot to purchase an annuity.

Retirement Component

Two-thirds of your monthly contribution will be allocated to this component. The retirement component ensures mandatory preservation of benefits until your retirement by preventing access to the fund in times of financial difficulty, even if you resign from your job.

At retirement, purchasing an annuity utilising the entire amount in this fund is mandatory. If your retirement interest is less than R165 000, you can receive the amount as a cash lump sum.

The retirement tax table is applicable at retirement. It provides less onerous tax rates, with the initial R550 000 tax-free should you wish to withdraw any remaining part of your savings component in cash.

Vested Component

The value of your retirement fund as of September 1, 2024 and the growth thereon beyond this date will be placed in the vested component.

All previous rules will remain applicable to this component, including access to funds upon resignation and a one-time withdrawal option from any preservation fund before retirement. At retirement, you can still take a third of the fund as a cash lump sum, while the remaining two-thirds must be used to purchase an annuity.

You can make tax-free transfers from the vested component into the retirement component. However, such transfers cannot be reversed.

Additional regulations apply to provident fund members 55 years and older on March 1, 2021.

Firstly, these members can continue contributing to their vested pot until retirement or opt to leave the fund. They don’t have to transition to the ‘two-pot’ system.

If they choose to switch, they can no longer contribute to the vested pot. Instead, they will make contributions according to the ‘two-pot’ system and have one-third of the contributions directed to the savings component and two-thirds allocated to the retirement component.

With this in mind, how does one continue to provide adequately for retirement?

Firstly, it is essential to understand that the savings component is a crucial safety net, but it is best left for dire unforeseen emergencies. It is still important to prioritise maintaining an adequate emergency fund outside your retirement funds.

Before tapping into the savings pot, it’s essential to ensure that your monthly contribution levels to the retirement fund are sufficient to avoid borrowing from an already inadequate source.

One could consider contributing more going forward and providing yourself with a financial cushion. This proactive approach not only safeguards your retirement savings but also offers a buffer against unexpected financial challenges, ensuring that your long-term financial goals remain intact despite short-term emergencies.

Your employer retirement fund is a group scheme structured to meet most people’s requirements. However, we are each unique and therefore also have unique needs and circumstances that must be factored into your planning if you are to have a successful retirement.

Therefore, it’s vital that you have your individualised retirement projections and planning done that will take into consideration precisely what you need to provide, how much you can regularly contribute to an investment portfolio, and then at what rate your investments need to grow to help you accumulate sufficient funds for your retirement goal.

Seeking professional advice, not only at retirement but during your career, as well as at junctures where you need to access your savings component, will assist you greatly.

Contributions into a retirement fund are tax-deductible up to 27.5% of your gross income, with a maximum of R350 000 per tax year. This does not mean you should not contribute more than the threshold. A retirement fund is a fantastic proposition as no tax is payable on interest earned, dividends received, or any capital growth achieved while in the retirement fund. Tax is due on withdrawal (where applicable) according to the taxation laws that apply at the time of withdrawal.

Any contributions you make above the threshold allow you to build a tax-free credit that can be applied to your withdrawals at retirement. With the assistance of a Certified Financial Planner®, you should determine the appropriate allocation between your retirement fund and discretionary investments that will meet your cash-flow requirements both now and once you retire. The plan should be robust enough to see you through should an emergency arise.

* Dube is a director and wealth manager at Centillion Wealth Advisory.