AskTheRightGuy: The proposed two-pot retirement system

The government first proposed the two-pot retirement system ("two-pot system") in 2021, as a reform that could encourage South African households to save more for retirement, while giving them limited immediate access to some of their accumulated retirement savings. In 2022, the National Treasury published the draft legislation for the two-pot system. Since then, there have been a lot of changes. The implementation date has changed numerous times. But the Parliament's National Council of Provinces has finally adopted the Revenue Laws Amendment Bill (RLAB)with 1 September 2024 as D-day. The RLAB now awaits the signature of the President before it is promulgated.

Guy Chennells, Chief Commercial Officer at Discovery Corporate & Employee Benefits, put together an #AskTheRightGuy series to unpack how these provisions will affect retirement funds. He starts the series with these frequently asked questions (FAQ)

1. What is two pot?

National Treasury has acknowledged that most South Africans face a financial dilemma of saving for retirement over the long term and dealing with extreme immediate financial pressures - especially financial emergencies. To strike a balance between these two opposing needs, Treasury has formulated the so-called 'two-pot retirement system'. One "pot" - now called component - is only for future retirement needs. The other one is intended to provide a lump sum at retirement but can be used for immediate financial needs.

This is how Treasury is proposing the new two-pot system will work from 1 September 2024:

• All the money you have saved up to 31 August 2024 will be known as your 'vested component'. The old rules will still apply to this money. This means, if you change jobs and want to cash it all out or you want to transfer it to a preservation fund and then access it from a preservation fund, you can still do so. Because you don't lose any access rights to your existing savings, there is no need to resign to access it before two pot system is implemented.
• All your contributions after 1 September 2024 will be split into two new components - a retirement component (two-thirds) and a savings component (one-third). The retirement component aims to provide an income in retirement, while the savings component aims to have a lump sum at retirement that you can either use for monthly expenses or for emergencies and ad hoc spending. But under the two-pot system, it can also be used to help you get through times of serious financial need on the road to retirement.
• When you retire, you will have to use the money in your retirement component to buy an annuity or multiple annuities (which will provide you with an income after your retirement). Because you can't take this money in cash and use it up quickly, this ensures everyone will have at least some ongoing income to live off in their retirement years. You won't be able to access this money before you retire.
• Different rules will apply for the 'savings component' (housing a third of your future contributions). You will be able to make one withdrawal from it every tax year while you are still employed. This will help members who are facing financial strain over the short term. When you get to retirement, whatever you have not withdrawn you can then take as a lump sum or transferred to the retirement componentand used to purchase an annuity.
• When the system is implemented, currently planned for 1 September 2024, there will be a once-off transfer equal to 10% of your vested money to your accessible savings component (called the seeding capital). This will be limited to R30,000. That means you should have some money in your savings component from day one. For provident fund members your seeding capital will be taken proportionately from your vested money and your non-vested money in the vested component.

2. I'm close to retiring - will the two-pot system affect me?

You won't automatically move to the two-pot system if all the following applies to you:

• You were aged 55 or older on 1 March 2021.
• You are a member of a provident fund.
• You have remained a member of the same fund from 1 March 2021 to 1 September 2024.

If that applies to you, you will need to "opt in" if you want to be a part of the two pot system. If you opt-in, your seeding capital will be calculated on the contributions that you made up to 31 August 2024.

If you don't opt-in, you will only have one vested component including all your retirement savings and you won't have your new contributions split into the two new components: the retirement and savings components from 1 September 2024. If you are a member of a pension fund, the two-pot system will apply to your contributions made after 1 September 2024.

If you are planning to work after your official retirement date, you might be considering opting into the two-pot system as it will give you some access to funds while working, if needed before you finally retire. But if you are retiring soon, you are more likely to stick to the old rules for ease of transition. It's advisable to get retirement counselling to make an informed decision.

But the good news is that whether the two-pot rules apply to your new contributions after 1 September 2024 or not, the system should have no impact on your retirement planning. Why not? Two-pot doesn't have any impact on what you can do with your money at retirement.

If you have 'vested' provident fund money, it will stay vested and can be taken all as cash on retirement . From your 'non-vested' money, you must buy an annuity with at least two-thirds of that money. You can then take up to one-third in cash, unless the two-thirds is less than R165,000 ('the de minimus'), in which case even you can take in cash.

3. After the two-pot system has been implemented, will I still be able to access my retirement fund money if I leave my employer?

Yes and no. Any money that you have saved in your retirement fund before 1 September 2024 can be withdrawn from your employer's pension or provident fund if you resign or are retrenched or dismissed. This is called your 'vested component'. From 1 September 2024, your contributions will be split into two new components:

• One-third will go into your savings component.
• Two-thirds will go into your retirement component.

You won't be able to access the money in your retirement component until you retire. You will be allowed to make one withdrawal from your savings component every tax year. If you withdraw from your savings component in a tax year and then resign from your employer later in the same tax year, you won't be able to make another withdrawal from your savings component on resignation, retrenchment or dismissal. If, however, your savings component has less than R2,000 when you leave employment, you will be allowed to withdraw that money.

4. What happens if I withdraw from my savings component?

It is important to remember that the money in your savings component is still money that you should set aside for your retirement. The fact that you may be able to withdraw from this component should not be taken lightly. If you want to retire with enough money to live out your retirement dreams, you should avoid withdrawing from your savings component at all costs.

In fact, not withdrawing the funds in your savings component will let you benefit from the tax advantages at retirement. This will ensure better retirement outcomes for you. It is also important to remember that the money in your savings component will be your cash lump sum when you retire. The amount in your retirement component must be converted into a steady income. If your savings component has been depleted, you won't be able to set aside an accessible lump sum to provide for emergencies or big ad hoc expenses during retirement.

Furthermore, if you don't withdraw your savings component every tax year, you will still be able to access them later should you need the money, and will be in a better financial position at retirement if you don't as your money will benefit from the compound interest effect on both the saving and retirement components during your working life.

What you might not also realise is that withdrawing from your savings component comes at a cost. SARS has confirmed that all withdrawals from the savings component will be taxed at the member's marginal tax rate (a single percentage that will differ per person). Your retirement fund will first get a tax directive to determine your marginal tax rate. The fund administrators will deduct the tax amount from the withdrawal. The withdrawal itself also comes with administration costs. Each retirement fund will calculate a processing fee that will be charged for each withdrawal.

If you have multiple retirement fund contracts, you can make one withdrawal from each of those contracts every tax year. That means you will pay marginal tax and administration costs multiple times.

5. I have a retirement annuity. How will two-pot affect my annuity?

Retirement annuities will follow the same rules as pension funds. The money you saved in your retirement annuity before 1 September 2024 will be your vested component, which you will only be able to access after age 55. This is because the vested component will continue to work according to the previous retirement annuities regime. However, the seeding rules for the savings component will apply to retirement annuity fund members too. This means you will also get 10% of your existing savings - limited to R30,000 - transferred to your savings component when the legislation comes into effect. If you are a member of more than one retirement fund, each of those retirement contracts in the retirement fund will have their own savings components, and they will all get once-off seeding capital at a Fund level.

The contributions you make to your retirement annuity once the legislation has come into effect will be split, with two-thirds going into your retirement component and one-third into your savings component. You'll be able to access the savings component money once every tax year, but you can't touch the retirement component until you retire.

If you are a member of a legacy retirement annuity (older retirement annuity funds), you won't be able to access any of your savings because they will be exempt from the two-pot system provided that the Financial Sector Conduct authority has granted the legacy retirement annuity an exemption . The reason for this is that many of these annuities include bonuses, penalties and insurance components, making them more difficult to navigate within the two-pot framework of allowing withdrawals and splitting the accumulated amount. You will have to check with your service provider to find out if your older annuity will be exempt from two-pot or not.

6. What should I expect on 1 September 2024?

On 1 September 2024, your savings component will get a once-off transfer from your vested money (money accumulated up to 31 August 2024). That is currently expected to be 10% of your vested money, up to a maximum of R30,000. In other words, everyone who has been contributing to a retirement fund for a while will have money in their savings component from day one, and it is likely to be more than the minimum withdrawable amount of R2,000.

So, while it's difficult to say with certainty what 1 September 2024 will bring, many funds are anticipating a flood of savings component claims. This will cause a backlog and delays as fund administration systems start using a new way of processing retirement fund contributions and withdrawals. To avoid the rush, perhaps it is better to wait a few months, to make sure administration systems are 100% functional before putting in a claim. Each member has a full tax year to withdraw from their savings component. So, if you can, avoid withdrawing completely and keep your savings component for retirement. If you can't, try to wait as long as you can so you don't get caught in the anticipated rush. There are bound to be teething problems in the first few months. Also, if you delay your withdrawal, you will benefit because you can then withdraw a higher amount which will have included the contributions you made to the savings component after 1 September 2024 and the seed amount.