Two-pot retirement system for South Africa incoming – but not everyone has to take part

South Africa’s upcoming two-pot retirement system is set to drastically change the retirement industry, but not every fund contributor will have to participate.

The two-pot system will come into effect on 1 September 2024 and is intended to help retirement fund members needing funds during an emergency.

One-third of all retirement contributions from 1 September 2024 will be allocated to the “savings component (pot)”, and members will be able to make a withdrawal of up to 100% that has accumulated in that component prior to retirement.

A minimum withdrawal of R2,000 will apply, and each member will be limited to one withdrawal per tax year.

Allan Gray’s Jaya Leibowitz said that the withdrawal will be taxed at the member’s marginal income tax rate in the year of withdrawal,” and will reduce the tax-free amount available to members at retirement. .

The “retirement component” will be inaccessible before the member retires and will consist of two-thirds of all retirement contributions plus investment growth.

The total amount in this component must be used to buy an annuity-providing product at retirement, including a living annuity or guaranteed life annuity.

Any savings prior to the September 2024 implementation will be put in the “vested component”, which will follow all current retirement regulations that apply.

Not the same for everyone

However, members of provident funds who were 55 years old or older on 1 March 2021 and have vested rights related to their ongoing contributions to that provident fund will be treated differently.

In 2021, provident fund members were barred from accessing 100% of their savings as a lump sum payment.

Provident funds thus became more like pensions, where fund members can withdraw one-third of their benefit as a lump sum while the remaining two-thirds must be used to purchase an annuity-providing product.

These “different” members will have the right to choose whether they want to participate in the two-pot system.

“The most recent draft of the legislation excludes these individuals by default. Where such a member does not actively elect to participate in the two-pot system, their contributions will continue to be credited entirely to the vested component, and the current rules will continue to apply,” said Leibowitz.

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