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What is Two Pot System
The Two-Pot Retirement System was implemented by the South African National Treasury to enable retirement fund members to access a small portion of their retirement savings before they retire for emergencies without having to leave their job.
Background of the Two Pot (Why it was implemented)
In general, South Africa has a poor savings culture. Many South Africans are cash strapped and simply do not have enough money to prioritise emergency savings. In 2021, partly as a result of South Africans suffering financially during the economic downturn brought on by the Covid-19 pandemic, National Treasury proposed changing the current retirement savings system to a “two-pot” system, to allow members to access up to a third of their retirement funds in an emergency.
This proposal, where members will be able to access contributions from one pot, with contributions to the other pot not accessible until their retirement, is part of government’s broader retirement reforms aimed at encouraging employees to adequately save for retirement. In the latest draft released in July 2023, the regulation now refers to the “pots” as “components”. However for better understanding we will use “pots” in this newsletter.
How it will work
From 1 September 2024, all your current accumulated retirement savings will be moved to a pot called the “VESTED POT”. All contributions made after 1 September 2024 will be split into two pots namely:
From the vested pot, 10% of your total savings, capped at R30 000 will be transferred to the savings pot. You can withdraw this amount from 1 September 2024. The minimum withdrawal amount is R2000.00.
Below infographic provides a better understanding on how your contributions will be split.
Who qualifies for it
Any South African who has a pension fund, provident fund, retirement annuity, or a preservation fund.
On 1 September 2024, provident fund members who were 55 years or older on 1 March 2021 can choose to:
What to consider before withdrawing from the savings pot
Tax Implications: Under the current system, pre-retirement withdrawals are subject to the tax rates Although these rates are more punitive than the rates that apply at retirement, the first R27 500 is tax-free.
Under two pots, money withdrawn from the savings pot will be added to a member’s income and taxed at their marginal rate. A consideration of the tax implications of these withdrawals includes whether they will push the member into a higher tax bracket. The fund’s administrator, SALT Employee Benefits will deduct the tax and pay it over to the South African Revenue Service. As a member you will receive the after-tax amount.
Withdrawals won’t be free: Members can expect to pay administration fees for processing withdrawals. Administrators will probably communicate these fees closer to the implementation date.
It is therefore encouraged that the savings pot is to be used as a safety net rather than a primary source of income. Savings should be reserved for genuine emergencies rather than day-to-day expenses.