The Two-Pot Retirement System Explained

Discover how this legislation will impact your retirement savings, understand the rules, and make informed choices for your financial security.

Ivor Mudzengi CFP®

Private Wealth Manager

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The National Treasury and the South African Revenue Service have recently unveiled the revised 2023 Draft Revenue Laws Amendment Bill and 2023 Draft Revenue Administration and Pension Laws Amendment Bill. These bills mark the first step in introducing the much-anticipated "two-pot" retirement system. While these bills are currently in the proposal stage, they may undergo further modifications before becoming official legislation, with an implementation date set for 1 March 2024.

To grasp the significance of this proposed legislation, it's essential to understand how it will affect your retirement savings. The "two-pot" system will divide your savings into three components: a retirement component, a savings component, and a vested component.

The Retirement Component: This component will hold a minimum of two-thirds of your contributions, commonly referred to as the first pot. These funds must remain preserved until your retirement.
The Savings Component: Up to one-third of your contributions will go into this component, known as the second pot. You can make one withdrawal per tax year, with a minimum withdrawal of R2,000, taxed at your marginal income tax rate. There is no maximum withdrawal limit.
The Vested Component: This component will contain all your retirement savings accumulated before the implementation of the "two-pot" system, subject to the current fund rules.

While this system offers a lifeline for financially constrained retirement fund members, it's crucial to note that it won't apply retrospectively. Consequently, the savings component will effectively start with a nil balance on 1 March 2024.

To ensure you have funds available in the savings component by that date, the latest draft legislation permits seeding. Members can seed the lesser of 10% of their accumulated retirement interest in the vested component on 29 February 2024 or R25,000 as "seed capital." Let's explore a few scenarios:

Member X: With R1,000,000 in their vested component on 29 February 2024, they can seed either 10% of R1,000,000 (R100,000) or R25,000.
Member Y: With R100,000 in their vested component on 29 February 2024, they can seed either 10% of R100,000 (R10,000) or R25,000.
Member Z: Possessing R10,000 in their vested component on 29 February 2024, they won't have access, as the lesser of 10% of R10,000 (R1,000) is less than the minimum withdrawal of R2,000.

For defined benefit funds and public sector funds, the seeding calculation mirrors that of defined contribution funds, with possible incorporation through a member's pensionable service adjustment. However, members of legacy retirement annuity funds will not have access, as these funds are exempt from the "two-pot" retirement system.

It's essential to consult your financial advisor to determine if your retirement annuity falls under the "two-pot" retirement system. Additionally, members who cease to be South African tax residents for a continuous period of three years can make a taxable lump-sum withdrawal from the retirement component.

Upon retirement, the savings component will be paid out as a cash lump sum. Alternatively, members can transfer part or all of it to the retirement component to purchase an annuity. In the second stage of implementing the system, legislation will address withdrawals by retrenched members with no other source of income.

Keep in mind that interpretations of this information may evolve with the final legislation's official sanction. While the proposed changes offer access to your retirement savings, consider this option as a last resort to ensure your long-term retirement goals are met.