The two-pot retirement savings system proposes splitting your future retirement fund contributions into two notional pots.
- One third of your contributions will be saved in a pot you can access once a year (known as the savings pot);
- Two thirds of your contributions will be saved in a pot you cannot access until retirement (known as the retirement pot).
How does the two-pot system differ from the current system?
Currently, you cannot access your retirement savings in a pension or provident fund before retirement unless you resign, retire from your job, are dismissed or retrenched.
You also cannot access your savings in a retirement annuity fund before age 55. There are a few limited exceptions to this such as on emigration and ill health.
When will two-pot retirement savings be implemented?
The system was first announced in the Budget in 2021, and a discussion document was published at the end of that year.
In 2022 draft legislation to amend the Income Tax Act to give effect to the system – the 2022 Draft Revenue Laws Amendment Bill – was published and drew many comments.
National Treasury agreed to postpone the amendments to the Act to 2023 and to do further work on certain aspects of the amendments.
In its 2023 Budget Review, National Treasury says forthcoming draft legislation will address most of the outstanding issues. These issues concern whether you will be able to withdraw from your savings made before the new system comes into effect, defined benefit pension funds, access on retrenchment and penalties on older retirement annuities.
National Treasury has stated that revised legislation will set the implementation date for the two-pot system as 1 March 2024.
The industry through the Association of Savings and Investments South Africa has indicated that retirement fund administrators and other role players will need about 18 months after the legislation is finalised to adapt their systems and set processes in place to deal with the two-pot system.
Which retirement funds will be included in the two-pot system?
Pension funds, pension preservation funds, provident funds, provident preservation funds and retirement annuity funds will all be included.
The intention is to include funds that are governed by their own legislation, like the Government Employees Pension Fund and the Transnet funds, in the new system but some further changes to legislation need to be in place before this can happen.
One of the issues the National Treasury is still working on is how withdrawals allowed under the two-pot system will affect defined benefit funds. Defined benefit funds pay a pension at retirement that is based on your final salary and the number of years for which you contributed to the fund. Pre-retirement withdrawals will affect this calculation.
How much will the two-pot system allow me to withdraw?
The draft legislation proposes that you be allowed to make one withdrawal a year of at least R2 000. If you have less than that left in your withdrawal or savings pot, you won’t be able to withdraw it.
The two-pot system also proposes that if you do not withdraw the one third of the contributions you make in any year, they will carry over to the next year and still be available for withdrawal.
You do not have to withdraw any money from your fund if you do not want to, and it is a good idea not to as you are likely to reduce your income in retirement significantly. Read more: Why is withdrawing from my retirement fund a bad idea?
Can I withdraw savings already in my fund when the two-pot system is introduced?
Treasury is considering “seeding” the savings pot with some money members have already saved prior to the new system being implemented.
Treasury has previously proposed giving you, as a retirement fund member, access to 10% of the value of your savings immediately when the new system is introduced. This amount, however, is capped at a maximum of R25 000. (This corresponds to the amount you can withdraw tax-free on resignation or dismissal. This amount has been increased to R27 250 from March 2023.)
However, before the draft legislation was introduced in 2022, National Treasury withdrew this proposal as the savings industry and the South African Revenue Service (SARS) were not prepared for this measure.
SARS will have to issue tax directives before members can withdraw any money from their funds and it is estimated that there could be two to three million requests for withdrawals creating a burden for SARS.
In the 2023 Budget Review, National Treasury says it will address this issue in draft legislation issued in 2023.
Can I ever access the two thirds of my fund that must be preserved?
From the implementation date, two thirds of your contributions to your retirement fund will be preserved to buy a pension or annuity at retirement and you will not be able to withdraw this money even when you change jobs.
Savings you have made before the new system is introduced will remain accessible as they are currently – this means if you resign or are retrenched from your job after the new system is introduced, you will be able to withdraw the savings made before the new system was introduced, as well as one third of your savings made under the new system.
Savings made before the new system begins will be known as your vested rights savings, as the right you had to withdraw when you saved the money is upheld into the future.
Another issue Treasury is working on is access to the preserved two thirds of your savings for those who are retrenched and have exhausted their savings pot, their severance pay and unemployment benefits.
In the 2023 Budget Review, National Treasury says this issue may only be addressed after the system is implemented, in a second phase of reforms expected in future.
Will I pay tax on what I withdraw?
The draft legislation proposes that the amount you withdraw be added to your taxable income and you be taxed at your marginal tax rate. This effectively takes away the tax deduction you enjoyed for putting money into the fund, but as long as your savings are in the fund, they grow tax-free.
If on resignation from your job you withdraw savings you have in your fund when the two-pot system is introduced, you will pay tax in line with the current retirement fund withdrawal tax table. See “How much tax will I pay if I withdraw money from my retirement savings before retirement?” in Smart About Money’s tax tables. Read more: Why is withdrawing from my retirement fund a bad idea?
Does withdrawing affect my cash lump sum at retirement?
Currently, members of retirement funds are able to withdraw one third of their savings at retirement as a cash lump sum.
Under the new system, if you withdraw from the savings pot before retirement, you will essentially be accessing this one third early.
If you take it all before retirement, you will not be able to take any cash at retirement and you will have to use all your savings to buy a pension.
Should I withdraw from my fund when the two-pot system allows it?
Your retirement fund savings are for retirement and you should preserve as much of your savings as you can to ensure that when you reach retirement it buys you a pension that replaces the bulk of your pre-retirement income. Read more: How much do I need to save for retirement?
Ideally you should have other savings and insurance to cover you for emergencies and you should definitely not use your retirement savings to buy things you want.
Many South Africans are already behind on their retirement savings because they have withdrawn savings when changing jobs or only started saving late.
Industry statistics show that many people have so little saved that their income in retirement will be less than a third of what they are earning when they retire.
Members of what is known as legacy or old-generation retirement annuity funds are contracted to remain invested for a term and altering those terms can incur penalties on your savings.
National Treasury said in the 2023 Budget Review this issue will be addressed in draft legislation issued during 2023.