The practical implications of the ‘two-pot system’ – what you need to know
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With the September 1 implementation deadline looming, South Africa’s ‘two-pot’ retirement reform is fast coming to the boil.
However, while President Cyril Ramaphosa is expected to sign the new Pension Funds Amendment Bill in the coming weeks, for many employers and labourers there remains much uncertainty.
This has prompted the Building Industry Bargaining Council (BIBC) to offer them a clear explanation of why this legislation has been drafted but, more importantly, how it will affect them directly.
The two-pot retirement system essentially 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.
It is largely a governmental measure to prevent a repeat of the situation that arose during the Covid-19 pandemic when retrenched citizens did not have emergency funds to fall back on.
The system applies to any South African in possession of a pension fund, provident fund, retirement annuity, or preservation fund and divides members’ benefits into two separate pots – a savings pot and a retirement pot.
Danie Hattingh, Principal Officer of the BIBC Retirement Fund, explains that one-third of contributions will go into the savings pot, which can be accessed once a tax year if needed.
“If you decide to make a withdrawal from your savings pot, you may withdraw everything in your savings pot as there is no cap on the maximum amount that you can withdraw. However, the minimum amount that can be withdrawn is set at R2 000 a year,” Hattingh says.
The retirement pot is an entirely different story.
When the system is implemented on September 1, two-thirds of retirement fund contributions will be allocated to a worker’s retirement pot and must be preserved to buy a pension or annuity at retirement. This money cannot be withdrawn, even if leaving a job or retirement fund.
Hattingh says that there are both short- and long-term considerations.
In the short term, retirement fund members will be able to withdraw a small portion of their existing savings immediately once the system is implemented. This is commonly referred to as “seed capital”.
“Seed funding (10% of the vested component to a maximum of R30 000) will be accessible from September 1. Members should be aware of tax implications, including potential changes to marginal tax rates, and the impact on future compound interest and overall retirement savings by withdrawing seed funding,” he says.
“The seed capital will be limited to 10% of the amount in your retirement fund account on August 31, 2024, subject to a maximum amount of R30 000. For you to have access to a withdrawal benefit of R30 000, the value of your retirement fund account on August 31, 2024 needs to be at least R300 000.”
When it comes to the longer term, Hattingh says as it is compulsory to preserve the retirement component on changing jobs, it is important to manage the transfer of this value and keep track of preserved values.
The two-pot system is beneficial in that it will allow individuals to access a portion of their retirement savings during times of financial hardship. Conversely, accessing even a portion of one’s retirement savings upfront can undermine one’s eventual financial security upon retirement.
The BIBC has drawn up a list of considerations for both employers and workers to ensure as seamless a transition a possible to the new system.
Employers
- Ensure updated employee details/ information.
- Ensure HR and payroll staff are well informed with how the two-pot system works.
- Keep employees informed of developments.
Workers
- Ensure information is updated with the employer – first name and surname (as per home affairs), ID/ passport number, cell number, tax number (as per Sars).
- Any withdrawals will require a tax directive from SARS. In the case of any outstanding debt to SARS, the revenue service will issue a notice to pay this debt from the withdrawal amount first before any funds are paid to the withdrawer.
- Stay informed – read all communication issued by the employer and/or fund administrator.
- Consider options carefully – consult with a financial advisor if needed.
- Members will be taxed at marginal tax rates on withdrawals made from the savings pot.
- The retirement fund or its administrator will apply for a tax directive from SARS and deduct the tax before paying the benefit.
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