Everything you need to know about the new Two-pot Retirement system
Starting on September 1, 2024, a new retirement system with two pots will be in place. This page has updates on the changes and how they will affect you.
How will it work?
Future retirement fund contributions will be split into two parts. One-third will go to savings. Two-thirds will go to retirement. Together, these parts will make up your retirement fund account. These parts will combine to form your retirement fund account.
Savings component
You can withdraw at least R2,000 from your savings once a year before retirement. When you retire, you can take out any remaining money as cash or use it to buy an annuity.
Retirement component
The retirement funds will stay until retirement. Your retirement funds will remain until you retire. When you retire, you need to use these funds to purchase something that gives you income. This could be a living annuity or a guaranteed life annuity.
Retirement fund account
Future contributions will go to different parts, but they all make up one retirement fund that should be considered as a whole.
Which components will my retirement fund account have?
You will have three main parts in your account:
1. Vested component
The vested component of your account consists of your existing savings at the implementation date – being your two-pot vested benefit and your harmonisation vested benefit (if applicable) – plus future growth thereon. No further contributions can be made to your vested component. Your existing rights will continue to apply to your vested component, i.e. your vested component will not be impacted by two-pot.
2. Retirement component
Two-thirds of all new contributions from the implementation of the two-pot system will be credited to the retirement component. For example, if you contribute R3 000 per month to your Allan Gray retirement fund, R2 000 will be credited to your retirement component.
The full amount in your retirement component must be preserved until retirement. At retirement, the full amount in this component must be used to purchase a retirement income-providing product, such as a living annuity or a guaranteed life annuity. This means you will not be able to withdraw a cash lump sum from your retirement component, either before or at retirement, unless the de minimis rule applies.
3. Savings component
On the start date, some money will be moved from your account to the savings part. After that, one-third of all new contributions will go into the savings component.
Before you retire, you can take out at least R2 000 from your savings once a year. It's crucial to know the consequences of accessing your retirement savings early in the long run.
When you retire, you can take any leftover money as cash. Alternatively, you can use it to buy a product that provides regular income. Examples of these products include a living annuity or a guaranteed life annuity.
What is seeding?
Seeding is the one-time funding of your savings account, taken from the vested part of your account. You must have this funding, and you cannot opt out. Seeding is a one-time deposit into your savings account. This money comes from the part of your account that you own.
You must accept this funding and cannot choose to skip it. You don’t have to take this money out right away. However, taking money from your retirement savings later can lead to problems. Seeding does not have immediate financial effects. Seeding itself does not have immediate financial effects.
The sum to be allocated will constitute 10% of your account's market value the day prior to the two-pot system's execution date, with a cap of R30 000. For instance, if your Allan Gray retirement fund account holds R100 000 on the day preceding the execution date, R10 000 will be transferred to your savings portion from your vested portion.
What will happen if I need to access my retirement savings?
The dual-pot system lets you tap into a part of your retirement funds, but it's crucial to conserve most of your savings until retirement to fully leverage the power of compounding and ensure a comfortable retirement. Consequently, you shouldn't consider your savings segment as a short-term savings tool - it remains a part of your retirement fund account, that is, a long-term investment designed to support your retirement.
Before retirement
The savings component of your retirement fund account will be seeded when the two-pot system is implemented. Thereafter, one-third of your future contributions will be credited to your savings component. You can make one withdrawal of at least R2 000 per tax year from the amount in your savings component.
Taking money out of your savings portion prior to retirement is subject to your marginal tax rate. Keep in mind that dipping into your savings portion before retirement will decrease the sum you can take out as a lump sum or use to buy an annuity when you retire. Hence, it's advisable to refrain from making withdrawals before retirement to ensure you have more choices when you retire.
Opting not to take out money from the savings portion of your retirement fund account within a certain timeframe before retirement carries no adverse consequences, as your right to withdraw from this part is not forfeited.
Under no conditions, including resignation from work or facing financial hardship, can you withdraw from your retirement fund, unless you are no longer a tax resident of South Africa.
Withdrawals from your vested portion prior to retirement will still be regulated by current fund policies. For instance, if your investment is in a retirement annuity fund, you won't be able to access the vested part of your investment until you attain the specified retirement age, even if you decide to quit.
At retirement
When making decisions, it's crucial to consider your retirement fund account in its entirety, despite the varying regulations associated with the different elements that constitute your account.
Upon retiring, you'll have the choice to withdraw the leftover amount from your savings component (or part of it) in cash, even if you've already made a withdrawal in the same tax year. Cash withdrawals at retirement will be subject to taxation based on the current retirement fund lump sum tax table. Additionally, you have the option to utilize some or all of the funds to buy a living annuity or a guaranteed life annuity.
The entire worth of your retirement element must be utilized to buy an annuity, unless the de minimis rule is applicable.
In case you possess a two-pot vested benefit, you're permitted to withdraw only a third of this benefit in cash, while the remaining two-thirds should be invested in a retirement income-generating product like a living annuity or a guaranteed life annuity. If you also hold a harmonisation vested benefit, you're given the choice to cash out the entire benefit. Please note, these withdrawals are subject to taxation.
What are the implications of accessing my retirement savings early?
Tapping into your retirement funds prematurely deprives you of the complete advantage of compounding. Utilizing any portion of your savings before retirement will diminish the sum you'll have at retirement to buy an income-generating product or to withdraw as a cash lump sum. You'll also miss out on the beneficial tax implications of withdrawing a cash lump sum at retirement compared to making withdrawals prior to retirement.
For instance, pulling out R30 000 from your savings portion on the date of the two-pot system's execution could diminish your retirement savings' worth by R130 000 in current monetary terms. Hence, you should only contemplate withdrawing from your savings portion in extraordinary situations and as a final option.
What are the tax implications I should be aware of?
Contributions
The tax handling of deposits into retirement funds will remain the same after the two-pot system is put into effect. Contributions to a retirement fund can be deducted from taxes up to 27.5% of the higher value between taxable income or remuneration (excluding any lump sum, withdrawal, or severance benefits from the retirement fund) per tax year, with a cap of R350 000 per tax year. Any contributions exceeding this cap will be rolled over to the following tax year.
Withdrawals before retirement
Should you choose to pull out funds from your savings portion prior to retirement, the amount withdrawn will be subject to taxation at your marginal tax rate.
Upon receiving your request for withdrawal, we will request a tax directive from the South African Revenue Service (SARS). This directive will specify the tax amount to be deducted from your withdrawal and remitted to SARS. If there are any unpaid taxes on your account, SARS may issue a deduction order (IT88), which we will need to enforce on your withdrawal. Subsequently, we will disburse the post-tax amount to you.
These withdrawals will not diminish the tax-free withdrawal limit accessible to you upon retirement.
Any permissible withdrawals from your vested portion before retirement will persist to be taxed under the existing system, that is, in accordance with the retirement fund withdrawal tax chart.
Withdrawals at retirement
Upon retirement, various choices will be available for the diverse elements of your retirement savings account.
You have the option to withdraw the entire sum from your savings component. This withdrawal will be subject to taxation based on the current retirement fund lump sum tax table. Alternatively, you can choose to transfer some or all of the amount to an annuity.
The entire worth of your retirement element must be utilized to buy an annuity upon retirement, unless the de minimis rule is applicable.
Any permissible withdrawals from your vested portion at retirement will persist to be taxed under the existing system, that is, the retirement fund lump sum tax chart.
What are my options if I resign?
You can withdraw from your savings if you haven't already made your one allowed withdrawal for the tax year.
You will not be able to withdraw from your retirement component.
The existing regulations for resignation will persist for your vested portion. For instance, if you belong to a pension or provident fund, you'll have the ability to withdraw 100% of your investment upon resignation, in line with particular fund guidelines. These withdrawals are subject to taxation based on the retirement fund withdrawal tax chart.
How will transfers work?
Should you shift your investment to a different retirement fund provider, all current elements in your investment (along with their rights) will be preserved during the transfer.
You will also have the permission to shift between elements within the same investment as mentioned below:
- Transfer from your vested component to your retirement component
- Transfer from your savings component to your retirement component
These are one-way transfers, and you will not be able to undo the transfer if you require access to your retirement savings.
Should I change how I invest my retirement savings?
The dual-pot system allows you to tap into a part of your retirement funds during extreme financial hardship, but it doesn't alter your investment strategy for retirement savings. You should consider all elements of your retirement account collectively and stay invested in funds that give you the highest probability of accumulating enough savings for retirement to ensure a satisfactory income after retirement.
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