On the 01st of September 2024, the Two-Pot retirement system will be implemented as President Cyril Ramaphosa has signed the Pension Fund Amendment Bill into law during July, which enables the implementation of the long-awaited retirement reform.
Last year there was proposed changes in the Draft Revenue Laws Amendment Bill which aimed to address two main concerns that the National Treasury had at the time:
One
The inability to access funds during a time of emergency – this was recently highlighted during the Covid-19 pandemic when many households were in financial distress, and had their only assets being tied up in retirement benefits. These are typically members who are in dire financial circumstances and their short-term requirements take precedence over their long-term retirement goals.
Two
The lack of preservation and retirement considerations can lead to a scenario where members resign from their jobs to access their retirement benefits in cash, resulting in a shortfall at retirement.
Although the new legislation refers to a “Two-Pot” system, it will not be applied retrospectively. Therefore, all contributions up until end of August 2024, along with future growth, will not be subject to the new rules, so it will be helpful to consider your retirement benefits in three separate pots.
Savings Pot
one third of all retirement fund contributions from 01 September 2024 will be allocated to your savings pot. The savings pot is the accessible portion of your retirement savings. Withdrawals can be made once a year, provided there is a minimum value of R2,000 in the savings pot. To kickstart your savings pot, “seed capital” of 10% of your vested pot as of 31 August 2024 will be transferred to it, capped at R30,000. It is essential to note that any pre-retirement withdrawals from your savings pot will be included in the member’s taxable income for that year and taxed at the member’s marginal income tax rate (between 18% – 45%). There is a clear tax incentive to wait until retirement to access your retirement savings, as taking any lump sums at retirement from your savings pot will be subject to the retirement fund lump sum benefits tax table (between 0% – 36%), with the first R550,000 being tax-free. The idea here is to deter members from accessing their savings pot for mere accessibility and reserve it for emergencies. At retirement, any remaining amount in your savings pot may be taken as a cash lump sum (subject to tax tables) or transferred to your retirement pot to purchase a pension annuity.
Retirement Pot
two-thirds of all retirement fund contributions from 01 September 2024 will be allocated to your retirement pot. This amount cannot be accessed until the retirement age of 55, and 100% of this pot must be used at retirement to purchase a compulsory pension annuity, providing an income during retirement. A full cash withdrawal is allowed if the balance in this pot isR165,000 or less, or if the member ceases to be a tax resident upon emigration for a minimum period of 3 years, subject to the retirement fund lump sum withdrawal benefits tax tables.
Vested Pot
This includes all contributions up until 31 August 2024, plus future growth. These benefits are taxed according to the existing tax provisions and rules (i.e., accessible on retirement at or after 55 or on resignation retrenchment, dismissal or death. There is no compulsory preservation on resignation, retrenchment or dismissal, and full withdrawal is allowed subject to the retirement fund lump sum withdrawal benefits tax tables).