South Africa’s new ‘two-pot’ retirement system – everything you need to know

The National Treasury, alongside the South African Revenue Service (SARS), is set to make some changes and clarifications to the original proposals on introducing the ‘two pot’ retirement system, says Victor Bucarizza, a wealth manager at GIB Financial Services.
“In essence, the system seeks to strike a balance between two problems: maximising retirement savings by minimising early withdrawals; and allowing for early access to retirement savings to address unforeseen events, such as Covid-19’s financial consequences,” said Victor Bucarizza.
According to Buicarizza, pension members in the future can make one taxable withdrawal a year from their savings’ pot’, where up to one-third of their contributions can potentially be withdrawn.
“The remaining two-thirds or more retirement ‘pot’ has to be preserved until retirement and used to purchase an annuity,” said Bucarizza.
Simply put, retirement funds would be broken into the following:
- The vested pot (amounts accumulated before the implementation date);
- 1/3 accessible savings pot and;
- 2/3 retirement pot is subject to complete preservation until retirement (contributions after 1 March 2023 must be preserved until the retirement date).
The new system is set to come into effect on 1 March 2024.
The system is not retrospective, meaning that the new rules will not affect existing retirement savings and contributions up until the date of implementation.
“These remaining savings and their subsequent investment return will retain their ‘vested rights’ – meaning that the rules that applied when the members made those contributions will continue to apply to them,” said Bucarizza.
“All contributions will continue to benefit from the tax deduction subject to existing limits.
“However, if a member exercises their right to withdraw from their savings pot, this amount will be added to their taxable income for the year, thereby negating the tax deduction. They will thereafter not be permitted to make a further withdrawal from the savings pot for a period of at least 12 months,” he added.
Bucarizza added that for anyone who was never going to make a withdrawal from their retirement, nothing has changed.
For those who need to make such a withdrawal of up to one-third pre-retirement, they will deplete the amount available as a lump sum upon retirement.
“The main change is that they have a greater choice in the event of an uncertain need,” said Bucarizza.
Unintended consequences
Bucarizza cautioned that there might be some unintended consequences under the new system.
“The number of retirement fund members drawing from their savings pot will impact administrators, potentially leading to delays in paying out. Such pay-outs by their nature are likely to be unforeseen events and time-sensitive,” said Bucarizza.
“Furthermore, it will reopen the door to the practice of pension-backed lending. Having a portion of capital available may tempt banks to see it as a source of secured lending, a first step in allowing pension-backed lending.”
Development
The Treasury has been discussing and implementing changes to the country’s retirement legislation for a decade.
This year July 2022, the 2022 Draft Revenue Laws Amendment Bill was released for public comment, setting out proposals for implementing a new two-pot retirement fund system to provide more flexibility for members.
The amendments address the historical reality that many members in financial difficulties had in the past felt obliged to resign from their jobs with the sole intention of ‘unlocking’ their retirement savings, notwithstanding the hefty tax bill on it, said GIB Financial Services, principal consultant Liz Botes.
Now they can tap into their retirement savings without the need to terminate their employment, said Botes.
“With compulsory preservation, the retirement pot will ensure that people are always advancing closer towards their retirement goal, hopefully creating a workforce that is less retirement-anxious and more self-sufficient.”
Read: Tips to help you save better for retirement – and avoid coming up short