Two-pot system: Early access to retirement funds in South Africa 2024

The new “two-pot” retirement fund system allows partial early access to your retirement funds – recognising that life is uncertain and people will encounter emergencies. It’s our government’s way of transitioning South Africa towards a future culture of saving, rather than settling for the current low retirement savings rate.

What’s the history around accessing retirement funds in South Africa?

In South Africa your retirement savings are invested either in individual retirement annuity funds or in employer-sponsored pension/provident funds. When you leave your employer, the current rules allow you to preserve your pension fund investment (keep the investment intact), or to withdraw your funds.  

While the best financial decision is to leave your pension invested, many withdraw the entire fund in cash when they change jobs. This has costly tax consequences, and while it may be necessary in the case of a retrenchment, all too often these funds are spent irresponsibly rather than being set aside and reinvested later.

The result is poor financial outcomes when you reach retirement, leading to hardship and potentially more people financially dependent on the state.

How to improve retirement outcomes for South African investors.

National Treasury and the financial services industry have identified mandatory preservation of retirement investments as the way for South Africans to move towards improved financial outcomes in retirement.  

Introducing this change in policy was never going to be easy, given the wide gap between South Africa’s highest and lowest earners. Advocacy for its implementation has come mostly from the trade unions, and understandably so, pointing out that it is pointless preserving funds for the future when you are unlikely to reach retirement due to existing below the breadline in the present moment.

With this reality on the ground, Treasury had to strike a balance between access and preservation, hence the “Two-pot solution” going forward. 

What funds will be affected by the two-pot legislation change?

All pension, provident and retirement annuity funds will be subject to the new legislation, including public sector workers’ retirement funds. 

How will the new two-pot system work?

From 1 September 2024 onwards, all retirement contributions will be split into two sub-accounts.  

    • One-third will be allocated to your Savings Pot, and 
    • Two-thirds will be allocated to your Retirement Pot

How will the Savings Pot work?

Your Savings Pot should still only be used in an absolute emergency, because the intention is to encourage people to keep savings intact until retirement. However, if you need access to emergency funds, you can withdraw from your Savings Pot (subject to a minimum amount) once within each taxation year, even if you are not leaving your employer.

Any withdrawal from the Savings Pot will be fully taxed as normal taxable income.

At retirement, you can access your Savings Pot as cash or use it to purchase a pension income via a life annuity or living annuity.  

How will the Retirement Pot work?

The Retirement Pot will not be accessible until you reach retirement age, at which point it must be used to purchase a pension income via a life annuity or living annuity.  

Rules for access to retirement savings as a result of death or disability are expected to remain unchanged. 

What about existing fund members who already have a retirement investment?

If you fall into this category you will end up with a third pot, referred to as the Vested Pot. On 31 August 2024, the existing balance on your retirement account will be allocated to your Vested Pot and as an implementation measure, the lesser of: 

a) 10% or 

b) R30,000

from the Vested Pot will be transferred into the Savings Pot, and this will be available for immediate withdrawal if required.

From then on, the balance left in the Vested Pot will remain invested and be subject to the current tax and access rules. This has the effect of avoiding a retrospective change to a long-term investment system, which would be disruptive.  

The Vested Pot will be accessible on resignation or retrenchment. 

At retirement age, the existing rules apply:

      • Up to one-third of the Vested Pot can be withdrawn as cash (subject to the exiting favourable retirement lump-sum tax tables), and 
      • the balance must be used to purchase a pension income via a life annuity or living annuity.  

What is the likely impact of this new two-pot system?

We expect there to be a limited impact in the short term, as access to most of the accumulated retirement savings will be subject to the same rules. It is likely that there will be some frequent, small Savings Pot withdrawals by fund members where previously this was not possible. However, as time passes and the two-third Retirement Pot component grows, we expect to see less “clearing out” of retirement savings on resignation resulting in better retirement outcomes for members. This will also potentially reduce reliance on the state in future generations. 

How important is preservation? A picture speaks volumes…

Allowing the compounding effect of time to work is the fundamental premise of starting your retirement savings early. When your savings are eroded by regular withdrawals, the growth effect of compounding is curtailed, resulting in fewer options when you reach retirement age. 

As you can see in the two graphs below, over time the effect of regular withdrawals from the Savings Pot results in a large reduction in the overall quantity of savings amassed.

 

 

Retirement Projection 1: Saving R9,000pm, less Withdrawals Achieves R4,500,000

Retirement Project 2: Saving R9,000pm, No Withdrawals Achieves R6,000,000

In the end, this investor would forego almost 25% of their potential retirement capital – accumulating only R4.5 million instead of a potential R6 million – which is an outcome you would rather avoid. 

Speak to your CERTIFIED FINANCIAL PLANNER® professional about the projected level of your current savings, and the potential impact of accessing savings before retirement age.


By Ian Beere, CFP® CA(SA)