Enter the two-pot system, a legislative innovation designed to strike a delicate balance between safeguarding those hard-earned retirement funds and providing individuals with the flexibility to navigate short-term financial needs.
This groundbreaking system is not only reshaping the landscape of retirement planning but also reshaping the way we perceive financial security in an unpredictable world. In this article, we delve into the intricacies of the two-pot legislation, unravelling its components and exploring how it aims to empower individuals to secure their financial future, one pot at a time.
Intentions behind the two-pot system
The primary goal of the two-pot system is to provide South Africans with the flexibility to access a portion of their retirement savings at various stages of their careers, creating a financial safety net for unexpected challenges. This need became evident during the Covid-19 pandemic when many individuals faced severe financial difficulties, often unable to access their retirement funds. Additionally, the system seeks to discourage individuals from prematurely depleting their savings by cashing them out when changing jobs or resigning solely to access their retirement funds.
Components of the system
The two-pot system is designed to strike a delicate balance between the long-term goal of accumulating retirement savings and addressing unforeseen financial challenges. To achieve this, the system introduces three distinct “components” within its framework:
- The savings component. This segment is tailored to meet the immediate financial needs of retirement fund members facing financial stress. It allocates one-third of a member’s net retirement fund contributions, which can be accessed before retirement. Members can make a single withdrawal from the savings component each tax year, with minimum withdrawals of R2 000 and a maximum of 100% of the component’s value. These withdrawals are subject to taxation at the member’s marginal tax rate. Any remaining balance in the savings component at retirement can be withdrawn in full, in part, or transferred to the retirement component to secure a retirement income through an annuity. However, waiting until retirement to access your retirement savings has a tax advantage. When taking lump sums from your savings pot upon retiring, it will be subject to the retirement fund lump sum benefits tax table, ranging from 0% to 36%, with the first R550 000 being tax-free. The goal is to discourage members from withdrawing funds from their savings pot prematurely and encourage them to maintain it for emergencies.
- The retirement component. Two-thirds of a member’s contributions are allocated to this component, accessible only as an annuity at retirement. Lump sum withdrawals are permitted in cases where individuals emigrate from South Africa and cease to be tax residents.
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The vested component. Comprising retirement savings accumulated before the implementation date of 1 March 2024. This includes vested benefits from provident fund contributions made before 1 March 2021 and any growth and non-vested benefits. Members retain their existing access rights to these benefits after 1 March 2024. This means they can make full withdrawals upon resigning or being retrenched from an employer’s pension or provident fund, make one full or partial withdrawal from a preserved benefit in a preservation fund, or, upon retirement, withdraw the entire value of the vested benefit in cash and up to one-third of the non-vested benefit in cash.
Once the new system takes effect, members can’t contribute to their vested component any more, except for provident fund members aged 55 or older on 1 March 2021. They can keep contributing to their vested component until they retire or leave the fund they were in on 1 March 2021. If they choose to continue these contributions, their entire contribution goes to the vested component, and they can’t contribute to the savings component and retirement component. However, if they want to participate in the new two-pot system, they can’t keep contributing to their vested component and must split their contributions between the savings component and retirement component like other retirement fund members.
Tax considerations
Regarding taxation, the fundamental principles remain unchanged. Retirement fund contributions continue to be tax-deductible within existing limits. Investment returns on a member’s benefits in the three components remain tax-exempt. Withdrawals from these components are subject to tax. Savings withdrawal benefits from the savings component will be taxed at the member’s marginal tax rate, with retirement fund administrators applying for a tax directive from SARS for each withdrawal.
In summary, the two-pot legislation aims to strike a balance between preserving retirement savings and providing flexibility for members to address short-term financial needs. By allocating contributions to different components, members can access savings when necessary while ensuring a substantial portion remains preserved for retirement, ultimately enhancing retirement security and financial well-being. The legislation is set to benefit retirement fund members by increasing their retirement savings and providing more controlled access to their funds.
