Why the two-pot retirement system is being introduced

Introduction

The two-pot system was initially scheduled for implementation on 1 March 2024. National treasury has recently proposed that the new effective date for the two-pot system will be 1 March 2025. The proposed two-pot system will allow members of Pension and Provident Funds, as well as Retirement Annuity policyholders, to access a portion of their retirement savings before they reach retirement age, without having to resign. The 2022 Draft Revenue Laws Amendment Bill contains key amendments on retirement reform to enable South Africans to save for non-retirement purposes through their retirement funds, whilst preserving more of their savings for retirement. These amendments aim to encourage members to preserve their retirement savings by making them more flexible to accommodate unforeseen financial pressures that members face while they are still employed.

Legislation

National Treasury, alongside the South African Revenue Service, is set to make some changes and clarifications to the original proposals on the ‘two pot’ retirement system. In the 2023 Budget Speech, Finance Minister Enoch Godongwana referred to the forthcoming revised draft legislation on the ‘two-pot’ retirement system that the government intends to publish later this year.  This will include details on the amount that could be immediately available when the system is implemented. According to the recent developments, the following four areas in the legislation required additional work: A proposal for seed capital. Legislative mechanisms to include defined benefit (DB) funds in an equitable manner. Legacy retirement annuity funds. Withdrawals from the retirement portion if one is retrenched and has no alternative source of income.

Member benefit

The two-pot system seeks to strike a balance between maximising retirement savings by minimising early withdrawals and allowing for early access to retirement savings to address unforeseen events. Some retirement fund members have unexpected expenses or emergencies that they unprepared for. Being able to withdraw some cash from their savings pot may help these members to overcome a financial challenge without borrowing money. Many South Africans are already struggling with debt. Increasing debt makes it even more difficult to afford current and future expenses.

Two-pot system proposal

The proposed system will allow members to access 30% of their retirement savings (short-term pot) for emergencies while preserving the remaining 70% for their retirement (long-term pot). In the future, members can make one withdrawal a year from their savings pot, where up to one-third of their contributions can potentially be withdrawn. The remaining two-thirds or more in the retirement pot has to be preserved until retirement.

The new rules will not affect existing retirement savings and contributions up until the date of implementation. The rules that applied when the members made contributions will continue to apply to the remaining savings and their subsequent investment returns. If a member chooses to withdraw from their savings pot, this amount will be added to their taxable income for the year, thereby nullifying the tax deduction. The members will thereafter not be permitted to make a further withdrawal from the savings pot for a period of at least 12 months.

For example, if a member contributes R1 000 a month to a retirement fund, R333 goes to the savings pot and R666 goes to the retirement pot. The savings pot can only be accessed once a year and only if the balance has reached R2 000.

If the member contributes to multiple retirement funds – for example, they contribute to a company retirement fund and a personal retirement annuity – they could make an annual withdrawal from each of these funds.

Provident fund members who were 55 or older on 1 March 2021 will be able to opt-in to the two-pot system. In other words, the two-pot system will not automatically apply to these members, as they will have a choice.

Retirement funds would be broken into the following categories:

• The vested pot (amounts accumulated before the implementation date).
• 1/3 accessible savings pot (short-term pot).
• 2/3 retirement pot (long-term pot) which is subject to complete preservation until retirement (contributions after the implementation date must be preserved until the retirement date).
  

Vishane Pramrajh

Employee Benefits Manager