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Effective 1 September 2024, retirement fund legislation will introduce a new two-pot system. For the first time, retirement annuity investors will be allowed to access a portion of their retirement savings before reaching the age of 55 or retirement.

Why has the two-pot system been introduced?

During the economic challenges brought about by the Covid-19 pandemic and subsequent lockdowns, many individuals faced hardships and sought access to their retirement funds.

The two-pot system aims to:

• Encourage investors to boost their retirement savings, with the flexibility to access up to one-third of their contributions in emergencies.
• Provide a lifeline for those experiencing economic difficulties.

How does the two-pot system work?

Under the new rules:

• Investors can initially transfer up to R30,000 to a new “savings” pot, which can be withdrawn before retirement, subject to tax.
• Subsequent contributions to the fund will be split between the savings pot (one-third) and the retirement pot (two-thirds).
• Existing capital in the retirement fund will move to a “vested pot,” governed by current retirement fund rules.

Which retirement funds will be included in the two-pot system?

The two-pot system applies to:

• Pension funds including both defined benefit and defined contribution pension funds;
• Pension preservation funds;
• Provident funds;
• Provident preservation funds;
• Retirement annuity (RA) funds; and
• The Government Employees Pension Fund, the Transnet and Telkom retirement funds that are governed by legislation other than the Pension Funds Act.

How are withdrawals from the savings pot taxed?

Retirement fund administrators have to apply for a South African Revenue Service (SARS) tax directive and withhold the required amount of income tax, before paying the remaining amount to the fund member.

The tax rate can range from 18% to 45%, depending on your personal marginal tax rate.

Withdrawals from your savings pot should take 10 to 15 business days to reflect in your bank account, after tax, depending on your platform administrator.

Withdrawals from the savings pot are an option, not an obligation.

Coronation has assessed the impact of early withdrawals on retirement capital and lifestyle. For instance, a 35-year-old withdrawing R10,000 from their RA could potentially reduce their retirement capital by R300,000 in the long term.

Conclusion

In summary, the upcoming shift to a two-pot retirement system aims to enhance flexibility and support one in times of need, starting 1 September 2024. While early withdrawals are now an option, we urge investors to carefully consider the long-term impact on their retirement goals. Our team is here to provide guidance tailored to your financial needs and to help you make informed decisions regarding your retirement planning.