YOUR MONEY: The two-pot system in a nutshell

The South African retirement fund industry will soon change radically. The National Treasury has published draft legislation to give effect to the new two-pot retirement reform proposals, and the proposed date for the legislation to take effect is September 1.

The two-pot reform will change how fund members can access assets in their retirement funds. It has two objectives: to allow fund members who have not yet retired to obtain a portion of their retirement assets in times of acute financial stress; and to improve the long-term preservation of assets until fund members retire.

As of September, new contributions to retirement funds will be split into two pots: a savings pot and a retirement pot. A separate component will house retirement funds that have accrued before September.

The savings pot will contain one-third of your contributions. At August 31, 10% of the value of your fund will be transferred to the savings pot. This is known as “seeding capital”.

From September 1, you’ll be able to withdraw funds from the savings pot, but you may do that only once every tax year, and it must be at least R2,000. The maximum will be R30,000 in year one. It will be taxed at your marginal income tax rate, and your retirement fund administrator will withhold the tax before paying you the rest. 

You can withdraw the remaining benefits at retirement. This will take into account previous retirement fund lump sums received, but will exclude withdrawals from the savings component. The remaining balance at retirement may be added to the retirement component and used to buy an annuity.

The retirement pot contains two-thirds of contributions. This pot cannot be accessed by members for cash withdrawals; the total benefit value must be used to provide an annuity at retirement. 

There is, however, an exception: if the benefit amount is below a certain minimum or if the member becomes a non-South African tax resident and remains so for more than three years.

Retirement funds that have accrued to members before September 1 will be preserved separately. This is the vested component. It won’t take further contributions but will remain invested by the retirement fund.

Members of preservation funds who have not made their one-off withdrawals may still do this at any time in the future.

On retirement, the member will be able to take up to one-third of the balance in the vested component as a lump sum and use the balance to buy a compulsory annuity. Any lump sums received on retirement are taxed, taking into account previous fund lump sums received but excluding withdrawals from the savings component.

As for vested provident fund benefits: current rules will continue to apply. Members who have been non-South African tax residents for a continuous period of three years or more can withdraw funds in the vested component, subject to tax. Again, this takes into account previous retirement fund lump sums received but excludes withdrawals from the savings component.

Members who were 55 years old on March 1 2021 are allowed to “opt out” of the two-pot system.

It is important to keep in mind that there will essentially be more than two pots after the annuitisation of provident funds, where a vested and non-vested “pot” system has already been created.

I recommend speaking to your adviser to understand these proposed changes further. The advice overall will remain that you should not withdraw any retirement funds before actual retirement. Remember, you need roughly R1m to invest at retirement to replace income of R5,000 a month before income tax.

— Elke Brink, wealth adviser at R21 Wealth Management, Stellenbosch

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