September in South Africa (“SA”) doesn’t just bring the fresh air of spring and a wardrobe switch to lighter clothes. This year, it also ushers in the new two-pot retirement system. It’s a hot topic among employees across the country, sparking discussions filled with both excitement and uncertainty. So, let’s dive in and explore what this new retirement system is all about, shall we?
What necessitated the change?
Currently, the South African Retirement Annuity Fund (“SARAF”), established in 1961, allows individuals to withdraw up to 100% of their retirement savings upon resignation from their current employer. This has led to many individuals resigning from their employer simply to access their funds in times of financial trouble.
To address this issue (i.e. the premature withdrawal of retirement funds upon resignation), the two-pot retirement system has been implemented and will come into effect from 1 September 2024. The system aims to strike a balance between long-term investment for retirement and an unexpected need for funds.
How does the two-pot system work?
Contributions made to retirement funds from 1 September 2024, will be split into two portions, the savings portion and the retirement potion, for fun (!) called pots and hence the name “two-pot”. One third of the contribution will go to the savings pot and two-thirds to the retirement pot.
Savings pot
A member of the retirement fund is able to access the funds which are held in the savings pot, however there must be a minimum amount of R 2 000 in the pot in order for the member to access the funds. Withdrawals from this savings pot can be done once each tax year (i.e. from 1 March to 28 or 29 February).
In the current system, withdrawals made upon resignation are met with tax penalties of higher tax rates, this penalty does not apply to withdrawals made in the savings pot. However, as the funds are taxed as normal income, a member could potentially be taxed in a higher tax bracket due to this additional income.
Retirement pot
The retirement pot will only be accessible on retirement or death. This pot aims to protect your investment ensuring that you do not withdraw from it. The diagram below illustrates an example of how the contributions will be treated in this new system.
So what happens with retirement savings prior 1 September 2024?
On 1 September 2024, an amount equal to 10% (limited to a maximum amount of R30 000) from retirement savings up until 31 August 2024 will be transferred to the savings pot. The amount transferred to the savings pot can be accessed by the member with effect from 1 September, where needed.
Does the old system still remain?
So, what happens to all the funds in excess of the amount transferred to the savings pot? Well, these funds are locked into the old system (i.e. the vested pot) and the rules of the old retirement system apply to them. This means that, when a person resigns from employment they are able to access all the funds in the vested pot (and the savings pot), but not in the retirement pot.
Key takeaways
The new retirement fund system is a significant shift, welcomed by some and met with hesitation by others. It’s designed to provide flexibility for life’s unexpected events while still preserving most of the retirement savings. Questions remain, such as how the system will handle retrenched members and whether they’ll have access to their retirement pot.
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