South Africa’s long-awaited two-pot retirement system officially launched today, marking a significant shift in how retirement savings are managed in the country.
Story Summary:
- The two-pot retirement system launched in South Africa on 1 September 2024.
- The system splits retirement contributions into two components: savings and retirement.
- South Africans can now access a portion of their retirement funds before retirement.
- The tax implications depend on the amount withdrawn and the individual’s tax rate.
Two-pot system goes live in South Africa
The new system allows retirement fund members to access a portion of their savings before retirement, offering more flexibility during financial hardships without compromising long-term retirement goals.
The two-pot system is designed to address the issue of fund members resigning from their jobs to access their retirement savings early, often leading to financial instability in later years.
With this reform, members can withdraw from their savings component without the need to resign, preserving the bulk of their retirement funds for the future.
How does the two-pot system work?
Under the two-pot system, retirement contributions are split into two main components: the savings component and the retirement component.
From 1 September 2024, one-third of all retirement contributions will go into the savings component, which can be accessed before retirement.
The remaining two-thirds will be directed into the retirement component, which can only be accessed upon retirement.
Additionally, there is a vested component that holds all retirement benefits accumulated before the system’s implementation.
This component will not receive further contributions but will continue to grow with interest.
For example, if an individual contributes R900 per month, R300 will be allocated to the savings component, and R600 to the retirement component.
The individual can withdraw from the savings component, but only once per tax year, with a minimum withdrawal amount of R2,000.
What are the tax implications?
Withdrawals from the savings component are subject to tax at the individual’s marginal tax rate.
There is no maximum withdrawal limit from the savings component, but the amount withdrawn will be taxed as part of the member’s income for the year.
It’s important to consider the tax implications carefully before making a withdrawal, as it could affect the overall tax liability.
For those who choose not to withdraw, the savings component will continue to grow tax-free until a withdrawal is made or until retirement, where it can be taken as a lump sum, also subject to tax.
What does this mean for South Africans?
The launch of the two-pot system brings both opportunities and responsibilities for South African retirement fund members.
On the one hand, it provides much-needed flexibility, allowing members to access a portion of their funds in times of financial distress without jeopardising their entire retirement savings.
On the other hand, it places the onus on individuals to manage their withdrawals wisely to ensure that sufficient funds remain for retirement.
“One would hope that financial advisors give good advice, that those who want to withdraw think carefully because it’s not a free call. You are reducing your future income, you’re creating a tax event earlier than what you normally would,” SARS Commissioner Edward Kieswetter warned.
Members are encouraged to consult with financial advisors to make informed decisions about their retirement planning under the new system.
The reform aims to strike a balance between immediate financial needs and long-term security, helping South Africans to better manage their retirement outcomes.
