New implementation date for the Two-pot Retirement system in South Africa
The new proposed implementation date of the two-pot retirement system is 1 September 2024. The date change comes after there was a push back from ministers who were requesting a move from March 2024 to March 2025 instead.
The compromise that was reached was moving the implementation date from March 2024 to 1 September 2024.
The two-pot system when implemented will be focused on allowing people to access a third of their pension savings before retirement.
The main hold ups in the implementation have been tied to the tabling of the key legislation and the resulting amendments that are required for the retirement fund rules. The bill needs to be approved before the revenue laws amendment bill is passed by the finance committee.
Parliament is still awaiting the retirement rules, and these would have to be tabled before implementation can take place.
Other steps still to take place after the retirement rules are tabled will be the registration of these rules and thereafter it could take up to 3 months to be finalised.
At this stage there are 1324 retirement funds who will be required to submit rules for registration and approval.
In South Africa, individuals can withdraw their entire pension savings upon leaving a job, but they are required to pay taxes. As a result, many retirees are left with minimal funds for their retirement. This often leaves them with very little money when they retire.
With the new system, retirement fund members can access part of their retirement savings through a "savings component". One-third of retirement contributions will be saved, while two-thirds will be used for retirement by investing in a vested component. The funds allocated for retirement component must be used to purchase an annuity after retiring.
Frequently asked questions
What is a two-pot retirement system?
The two-pot system will be used for the Government Employees Pension Fund (GEPF) and other similar funds. It splits contributions into two pots: one for savings and one for retirement. From March 1, 2024, 1/3 of contributions go to savings, and the other 2/3 go to retirement. (This date has been shifted to September 1, 2024).
Are drawings from the savings pot taxable?
The tax authorities will tax withdrawals from the savings pot as part of the member's taxable income, based on their marginal tax rate. You should reserve these funds for genuine emergencies rather than day-to-day expenses.
Which funds does the two-pot retirement system apply to?
The proposed two-pot system will apply to all defined benefit funds, including the GEPF. However, the calculation methods for the two pots will differ because of the unique nature of defined benefit funds. We will base the allocation of contributions to the savings and retirement pots on the member's pensionable service.
What happens if you resign?
When members resign, they will receive their entire actuarial interest, which includes the vested and savings pot balances. We will preserve the retirement pot and only allow access upon retirement or in the event of death. The treatment of the retirement pot on retrenchment is still under consideration as at the date of this post.
What happens with the two-pot retirement fund in the case of a divorce?
When a couple divorces, the ex-spouse will receive a share of the member's pension, as decided by the divorce agreement. The pension interest comprises the balances in the vested, savings, and retirement pots respectively.
What happens in the event of death?
The benefits paid when a member dies will depend on the amounts in the three pots. This will take into account any service adjustments that have already been made. No requirement to annuitize the balance from the retirement pot.
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