By: Lana Visser-Galant

Retirement fund administrators will soon be implementing the two-pot system for pension funds, provident funds and retirement annuities, but many are cautioning about the potential impact this could have on members. This article unpacks what it is, and highlights both the benefits and the risks involved.

What will change?

Currently, all savings within a retirement fund is subject to annuitisation rules upon retirement; that is, you may take up to one-third as a cash lump sum, while the balance of two-thirds must be used to purchase a compulsory annuity. Pension and provident funds can be accessed in cash before retirement, but this is only as a withdrawal upon resignation.

From September 1, 2024, all contributions toward members’ Pension and Provident funds, as well as Retirement Annuities, will be split between two components – the retirement pot and the savings pot. One-third of your contribution will be allocated to the savings pot and two-thirds will be allocated towards the retirement pot. Essentially, the split that would be available at retirement is being done upfront, but you are now able to access your savings pot before retirement without resigning.

Provident fund members, however, who were 55 years or older on March 1, 2021, will not be subject to this new two-pot system, but they do have the choice of opting in, should they wish to.

What happens to your existing retirement fund benefit?

The funds which you have accumulated within your retirement funds up until August 31, 2024 will be your vested component. This component or pot will not be added to and will still be subject to the existing annuitisation rules; that is, you may access up to one-third as a cash lump sum at retirement. Of this vested component, 10% of the value up to a maximum of R30 000 will be allocated to your savings pot as a once-off transfer.

How does the savings pot work?

Members may make withdrawals from their savings pot before retirement, subject to a minimum withdrawal of R2 000. Only one withdrawal may be made within a tax year and the amount taken will be added to your taxable income and taxed at your marginal rate. This means that a withdrawal before retirement will not be taxed according to the retirement lump sum tax tables.

What then happens at retirement?

At retirement, you will have three components to your retirement fund – a vested component, a retirement component, and a savings component. You will have access to up to one-third as a cash lump sum from your vested component and may access up to 100% of your savings component. The full retirement component must be used to purchase a compulsory annuity and no cash will be available from that balance.

Let’s look at an example:

Amy is currently 40 years old and her planned retirement age is 65. She has a pension fund through her employer with a balance of R800 000 on August 31, 2024. She currently contributes R1 200 to the pension fund each month. On September 1, 2024, Amy’s pension fund will be split into the three components, with R30 000 allocated to the savings component (10% of R800 000 exceeds the maximum), which will receive one-third of all future contributions, R770 000 allocated to the vested component with no further contributions allowed and no immediate allocation to the retirement component, but two-thirds of all future contributions will be added to it.

What now?

Speak to your financial planner about the two-pot system and how this will affect you and your retirement savings. If you find that you are in need of a withdrawal from your savings pot before retirement, speak to a tax specialist to guide you on the tax implications of being taxed at your marginal tax rate, especially if it could push you into a higher tax bracket.

* Visser-Galant, financial planner, Fiscal Private Client Services.

PERSONAL FINANCE