SIMON BROWN: Two pots for your pension

The two-pot system for retirement funds is now officially good to go and will start on March 1 2024. 

The idea was first raised during the pandemic as a way to help those who saw their income reduced or even disappear completely. The idea is to allow limited access to our retirement savings. It has taken a lot longer than initially planned but the system as proposed looks really good. 

What will now happen with all retirement savings after March next year is that monies invested will be split into two pots. The first pot will have two-thirds of your contributions and will be your retirement pot that you can access only after the age of 55. When taking this money out, the normal rules will apply in that you’ll need to buy an annuity with the money and there will be tax payable on the same scale as the existing rules. 

The big change is that you will have a second savings pot into which the other third of contributions will be deposited. This pot you can draw from before retirement age at 55, as and when you need it. Any withdrawal will, however, be added to your income and taxed as per normal. 

The idea is that this will stop people quitting a job in order to access retirement savings as you can rather access your savings pot. It also helps those who do find themselves in financial trouble to get some relief. 

Importantly, you cannot access your retirement pot early (except in the case of death or on leaving the country). As a result, in time South Africans should start retiring with more retirement money.

Those with existing retirement plans will need to convert to this new system. Your savings pot will be seeded from existing retirement funds you’ve saved, though only 10% of your retirement funds (capped at R25,000) will be in the savings pot. 

So if you have R130,000 in retirement savings you can draw R13,000. But if you have R1,300,000 you can take out only R25,000. 

Another key point is that the tax benefits of retirement funds remain as is; namely, that contributions are tax deductible with either R350,000 or 27.5% (whichever is smaller) being deducted from your income when you pay tax every year. 

What is also important here is that if you do contribute in excess of the limits above you can roll the excess contribution into the next year, or even following years. 

So if you contribute R500,000 you can claim R350,000 off your income (as long as it’s less than 27.5% of your income) in this tax year. The extra R150,000 can be claimed next year, or if you again hit the contribution limits in a following year. 

This can be very useful if you build up a large pot of excess contributions ahead of retirement. Then when you get into retirement you can use the built-up excess to reduce tax liability, potentially for a number of years.