Two-Pot Retirement System

In June 2023, National Treasury published draft legislation which introduced significant changes to the structure of retirement fund contributions and benefits in South Africa. These proposals were commonly referred to as the Two-Pot retirement system. The required legislation has been signed recently, and the two-pot system will be applicable from 1 September 2024. 

The Two-Pot system, in essence, creates three separate retirement savings components (“pots”) for each retirement fund member on 1 September 2024 as follows:

1. Vested portion (Pot):

            •           Fund value up to 31 August 2024.

            •           No change - the current retirement fund regime will remain applicable to these funds.

                        Seed finance - 10% will be transferred into the Savings Pot on 1 September 2024, up to a                                    maximum of R 30,000.

      2.    Savings portion (Pot):

            •           One-third of all new contributions from 1 September 2024.

            •           Plus, seed finance (as above), being 10% of total fund value on 31 August 2024 – up to a                                      maximum of R 30,000.

       3.   Retirement portion (Pot):

            •           Two-thirds of new contributions from 1 September 2024.

            •           These funds cannot be accessed until retirement age as legislated.

Withdrawing from the savings Pot

• Fund members can withdraw from the savings pot once during each tax year.
• Withdrawal is subject to a minimum amount of R 2,000.
• Remember that 10% of the fund value is transferred into the Savings Pot as seed finance. For those members whose fund value is less than R 20,000, the pot value will be less than R 2,000, meaning that these members will not be able to draw any money until the Savings Pot reaches R 2,000.
• One-third of all future savings will be added to this pot from 1 September 2024, so this amount will grow each month, subject to withdrawals.
• All withdrawals from the savings pot will be taxed.

Why has National Treasury made these changes to retirement fund rules?

National Treasury has been making changes to retirement fund rules for many years. The changes that will apply from 1 September 2024 and the other changes that have already been made have two main aims:

1. To increase the retirement income that members receive when they retire.

2. To help members get through financial challenges that may happen before retirement age.

The latest rule changes are intended to help fund members balance their needs now with their future needs. It is strongly recommended that members keep their retirement savings invested for retirement whenever possible, including any savings in the savings pot.

Even though the new rules will allow withdrawal of some cash from the savings pot before retirement while employees are still working, it’s better to keep all retirement savings invested for retirement. This will give members the best chance of having enough to live on one day when they stop working.

Below are some examples, illustrating the effect of the tax paid and an estimated admin fee charge on a withdrawal from the Savings Pot of R 2,000, R 5,000 and R 10,000.

• Any withdrawal from the Savings Pot will reduce the amount received at retirement.
• Marginal tax rates increase the higher the salary is and can peak at 45%.

However, should employees really need to withdraw from the savings pot, they should engage with an accredited financial adviser who can explain how this withdrawal could end up costing them more tax than they are actually liable for.

Vishane Pramrajh

Employee Benefits Manager