Two Pot System - An Explainer
Opening up the cookie jar
Recently there have been some changes to access of Retirement Funds before Retirement. The new dispensation would see that cash-strapped Retirement Savers would have access to a portion of their Retirement Savings before Retirement.
Below we lay out the why what and how of the so-called Two Pot System.
Why
It should not surprise you that the past decade-plus has left quite a mark on most South Africans’ wallets. Two recessions, a pandemic, a war and an ever-changing global landscape, are all driving uncertainty.
This difficulty is not only felt by South Africans but people across the world. When times are tough, it is hard for most people to understand why they can’t have access to their own money, in the form of Retirement Savings. Why should a future event trump the discomfort of financial pressure now? The government and regulatory stakeholders have decided to create a form of access, called the Two-Pot system, or Three pot system (whilst we transition).
What
The Two Pot System will be introduced in September, and will work in the following way:
Retirement contributions, whether they come in the form of Retirement Annuities, Provident or Pension funds or Preservation Funds will be split into three pots. It is important to note that these apply separately to separate funds.
The first is called the Vested Pot, the second is called the Savings Pot, and the third is called the Retirement Pot.
The Vested Pot will hold Retirement Savings made before September 2024, and the rules that apply to the various funds held will still apply by a Grandfather clause. That is, if you had access to withdraw funds in a Provident Fund or Provident Preservation Fund, that access will still be granted if necessary. This is the transition phase pot.
The Savings Pot will hold retirement savings that you can access prior to retirement, subject to certain T’s & C’s (discussed below). The Savings Pot will also get a once-off seeding from your savings held in the Vested Pot, of 10% (up to a maximum of R30 000) upon commencement.
The Retirement Pot will hold funds that are ONLY meant for retirement purposes. This pot will hold the bulk of your retirement savings in the future. The Retirement Pot will still be inaccessible until retirement (as was with the previous dispensation), subject to certain special circumstances.
From September 2024 onwards contributions to all Retirement Products will happen in a one-third, two-thirds fashion, with one third going to your Savings Pot and the two thirds going into your Retirement Pot. For instance, if you contribute R3000 per month into a retirement annuity, R1000 will go into your Savings Pot and R2000 into your Retirement Pot.
How
The Two Pot system will come into effect from 1 September 2024, conscription to this is automatic, meaning there is no opt-in or opt-out. The only exception to this rule is for certain members over 55 years of age, who were a member of a provident fund by 1 March 2021, and are still a member of that same fund. In this instance there will be a choice to opt in or out.
You will be able to withdraw from your Savings Pot before retirement. Withdrawals are allowed once every tax year. The maximum amount you can withdraw is the total amount of savings in the Savings Pot at the time of withdrawal. The minimum withdrawal amount is R2000 (before tax and fees, discussed below). Withdrawals from the Savings Pot will however not be allowed in the following circumstances:
There is an existing divorce order or maintenance order
There is a pending divorce order or maintenance order
The fund has given the member a housing loan or guaranteed a housing loan for the member
The employer has sued the member because of misconduct and got a judgement - not executed yet
The employer is suing the member because of misconduct and judgment pending - 12 months max
You are not forced to withdraw from the Savings Pot and the choice is yours if you would like to access these funds. If you do not take a bite you can access these funds at retirement as originally intended. You will only be able to access funds in the Retirement Pot at retirement (also not paid out at leaving of employment), as it was previously. These funds will only be paid out as an annuity - never in cash.
What is important to note is that although there is access, this access does come at a price and the price of access is also multi-pronged:
Tax: All funds extracted from the Savings Pot will be added to your Taxable income, thus effectively causing it to be taxed at your marginal rate of return. For example, if your marginal tax rate is 35% and you withdraw R10 000 - you will only receive R6500 after tax. These withdrawals will be taxed before being paid out to you.
Fees: There has been provision made for providers charging a withdrawal fee, clarity on this has not been established, but will vary from provider to provider. It may come in the form of a flat rate charged, eg. R400 per disbursement, or some funds may opt for a percentage based fee.
Cost of Lost compound interest: This one is slightly more meta, as it is not a set cost per se, but will vary based on the amount withdrawn and time left till retirement. This may be the most costly of all the fees, as South Africans are well known to be very underfunded when it comes to retirement. Without careful planning and sound advise, this access lifeline may turn out to be a noose.
Taking all of this into account, access per se is not a bad thing, but treating this as a method to buy shiny things will have big repercussions. Treat this access as a last resort, do not make use of these withdrawals willy-nilly. The hope is that South Africans will now be more open to contributing to retirement products, only time will tell.
