2 pots are better than 1: The 2 pot retirement system

Apr 25, 2024 12:22:03 PM

The two-pot retirement system aims to empower more South Africans to preserve their retirement savings when they leave a job or change employment, while enabling controlled access to these savings in times of financial hardship – Sanlam

A couple planning their retirement on a tablet while sitting on a couch

By Fiona Wakelin

From 1 September 2024 retirement fund members will be able to make partial withdrawals from their retirement funds before retirement, while preserving a portion that can only be accessed at retirement. The purpose of this is to offer flexibility to those fund members experiencing tough financial times, while at the same time supporting long-term retirement

In many cases, retirement funds. Under the current system members are resigning from their funds to access savings to pay off debt – which is a short term solution and does not bode well for retirement.

This new two-pot system has been conceptualised and designed so that those fund members who are experiencing hard times financially will have access to a portion of the savings component before retirement. A “divine and” instead of an “either or” approach.

What does this mean for you?

The new system will apply to all private sector and public sector retirement funds, except for the old generation legacy retirement annuity policies, or funds with no active participating members. Pensioners and members of provident funds who were 55 years

and older on 1 March 2021 who have not opted to be part of the two-pot system will also be excluded.

How it will work – the 3 components

The following shows how this system will actually work in practical terms. Importantly the reform will create 3 components:

Savings component
Retirement component
Vested component

After September 1, only the savings and retirement components will receive retirement contributions while the vested component will contain those retirement benefits accumulated by the member prior to implementation date - which will continue to accumulate investment growth.

Where do the 2 pots come in?

Under the new system, retirement contributions will be split by retirement funds into the savings pot and the retirement pot. A ratio of 1/3 of total contributions will go into the savings component and 2/3 of total contributions into the retirement component.

The savings pot will be accessible at any time, but withdrawals must be a minimum of

R2 000 with only one withdrawal being permitted in a tax year. There is no maximum withdrawal limit and the withdrawal will be taxed at the member’s own marginal tax rate.

The retirement pot cannot be accessed on resignation – only at retirement.

The vested component – which is the retirement value accumulated up until 31 August -

will not take further contributions - if you resign sometime in the future, you

will still be able to access it or have it transferred to a preservation fund.

Getting things started - seeding the savings pot

To get things started, 10% or R30 000 (whichever is lower) of the value of your fund on 31st August 2024 will be allocated to the savings pot. This seeding capital will be a once-off transfer and will not be repeated.

Read the full article in the April 2024 edition of Public Sector Leaders

Public Sector Leaders