Introduction of the two-pot retirement system - when can you access your retirement savings?
It has already been widely reported in the media that National Treasury released the draft legislation that will enable the “two-pot” retirement system during the course of last week. What is the “two-pot” retirement system? In short, it enables South Africans to save for non-retirement purposes via their retirement funds. It does so by requiring retirement funds to establish a “Savings pot” (which can be accessed by the member prior to retirement) and a “Retirement pot” (which can only be accessed on retirement and must be utilised to purchase an annuity). It is clear from some of the public comments on those reports that many South Africans are unsure and concerned as to how the “two-pot” retirement will impact them. The purpose of this article is to address some of the fundamental questions and concerns that have arisen in relation to the ”two-pot” retirement system.
- When will the two-pot system take effect? The proposed effective date is 1 March 2023 however that is subject to the promulgation of the final legislation that gives effect to the changes. The legislation is currently in draft form and open for comments.
- How are my contributions split between my Savings pot and my Retirement pot? The rules of your fund must provide that up to one-third (1/3rd) of your contributions be allocated to your Savings Pot and that not less than two-thirds (2/3rds) of your contributions be allocated to your Retirement Pot. This relates only to retirement funding contributions – it does not relate to contributions toward fund expenses and risk premiums (for death and disability insurance). It also only applies to contributions after 1 March 2023. Any contributions in excess of the current deduction limit (27.5% of taxable income or R350 000 per annum) must flow to the Retirement pot.
- How much can I access from my Savings pot? You can withdraw whatever is in your savings pot however the withdrawal can’t be less than R2000 and you are only allowed one withdrawal per year.
- At what rate will I be taxed on withdrawals from my Savings pot? Withdrawals from your Savings pot will be included in your gross income and so will be taxed at your marginal rate if you access your Savings pot prior to retirement. The lump sum retirement benefit tax table (in terms of which up to R500 000 is tax-free) will apply to any amount that you access from your Savings pot on retirement.
- Should I withdraw from my fund now in order to access my accrued savings as a lump sum? No, all accrued amounts up to 1 March 2023 will be included in a separate pot, your “Vested pot”. You can still withdraw any portion of your Vested pot as a lump sum on withdrawal (for instance if you resign or are dismissed) after 1 March 2023 that you were entitled to withdraw on 1 March 2023, together with fund return on that amount. This includes vested rights for individuals aged 55 years and older who were a member of a provident fund when compulsory annuitisation was introduced on 1 March 2021. It is important to remember that the Savings pot and Retirement pot only apply to contributions after 1 March 2023.
- When can I access my Retirement pot? Only when you retire and it must be utilised to purchase an annuity unless the value of your Retirement pot is less than R167 500 in which case you can take the full value as a lump sum.