South Africa’s ‘two-pot’ retirement system to kick in on SUNDAY
South Africa’s new ‘two-pot’ retirement system will come into effect this weekend on Sunday, 1 September 2024.
Judging by questions received by The South African website, there are a number of confused South Africans out there.
Read further to help shed some light on the changes ahead.
Let’s start with a frightening stat: Less than 10% of South Africans are on track to retire comfortably.
But what does the introduction of the two-pot retirement system from 1 September mean for those who are ill-prepared for retirement?
While many South Africans may see this new system as an opportunity to access their retirement savings early, it’s very important to think carefully about how withdrawals will impact your retirement pension funds, retirement annuities or preservation funds if you want to retire comfortably.
Following President Cyril Ramaphosa’s approval of the Pension Funds Amendment Bill which paved way for the implementation of the two-pot retirement system, Ester Ochse, Product Head at FNB Integrated Advice, is of the view that the two-pot system is intended to encourage South Africans to preserve their retirement savings while allowing access to a portion of funds, in the event of a very serious financial emergency.
“Taking money out of your retirement savings can slow down the growth of compound returns. Even if it feels like it’s only a small withdrawal for now, it could make a big difference to the amount that you can fully-access when you retire. So, it’s best to only take money out if it’s an emergency and you have no other options. It’s also critical to consult a qualified financial advisor who can quantify the impact of withdrawing your retirement savings,” says Ochse.
HOW IT WILL WORK
Under the two-pot system, retirement savings existing before the 1 September 2024 will be defined as the “vested pot” and you will not be able to contribute into the vested pot after 1 September 2024.
This vested pot will have the same retirement rules that are applicable to your retirement savings before the 1 September 2024.
From the 1 September 2024, all future contributions into your retirement fund will be split into two: one third of your contributions will go into a “savings pot” and two-thirds will go into a “retirement pot”.
Here’s where it gets a little confusing …
To kick-start the savings pot, your initial contribution will be seeded from the vested pot; the seeding amount will be 10% of the of the total funds available in your vested pot subject to maximum seeding of R30 000.
Seeding into the savings pot will be once-off and future funding will come from one-third of your future contributions.
The retirement pot is funded from two-thirds of future contributions and will only be accessible at retirement age.
Even though the savings pot can be accessed once a year there are some applicable rules:
- You can only access it once a tax year (1 March – end February)
- The minimum withdrawal amount is R2 000
- Withdrawals will be taxed in line with your marginal tax rate
- SARS will prescribe the amount of tax to be paid via a tax directive issued to the administrator
- SARS is legally allowed to collect any outstanding taxes or penalties from your savings withdrawal benefit
While it may be tempting to dip into the savings pot on a regular basis, this will have significant impact on long-term retirement stability and one’s retirement lifestyle.
Did you know?
According to the Association for Savings and Investment South Africa (Asisa), it is estimated that 94% of South Africans are not on track to retire comfortably.
Do you fully understand the new ‘two-pot’ retirement system?
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