Treasury’s proposed two-pot system will be implemented from 1 March 2024, bringing about a significant change in the South African retirement fund system.

What is the two-pot system and how does it work?

From 1 March 2024 all contributions to Reg28 retirement products (pension funds, pension preservation funds, provident funds, provident preservation funds and retirement annuity funds) will be divided into two ‘pots’.

One-third of your monthly contributions will be allocated to an accessible savings pot. Withdrawals from the savings pot can only happen once a year with a minimum withdrawal amount of R2,000. Withdrawals will be included in your gross income and taxed as per your income tax bracket.

The other two-thirds will be allocated to a non-accessible investment pot. As the name implies, the ‘non-accessible pot’ cannot be accessed until you’ve reached the Reg28 retirement age of 55 years – even if you resign, are retrenched or change jobs.

But here’s the plot twist: It’s actually a three-pot system. Your existing retirement savings, up until the implementation of the two-pot system, will be allocated to a vested pot (the third pot). These funds will remain subject to the fund rules. In other words, your existing savings won’t be broken up into the ⅓ and ⅔ prescribed pot allocation and you’ll only be able to access the funds when you’ve reached retirement age.

Treasury is, however, allowing retirement fund members the option to access “seed capital” from their existing retirement savings when the new system is implemented. This is calculated as 10% of the value on 29 February 2024 but is capped at a maximum amount of R25,000 and subject to tax. So if you have R150k saved in your retirement annuity, you can get access to R15k when the new system is implemented.

Why this change?

South Africa has one of the lowest savings rates in the world. So it’s no surprise that the majority of South Africans don’t have a cash buffer to provide support when an emergency strikes. So the two-pot system was proposed by Treasury as a way to give cash-strapped South Africans access to their retirement savings without having to take drastic measures like quitting their jobs.

What doesn’t change?

If you never planned to withdraw from your retirement savings, nothing changes (that said – emergencies are never planned). When you’ve reached retirement age, the money in the savings pot will be paid out as a lump sum, while the funds in the retirement pot must be used to purchase an annuity.

Some realities to consider

Considering that this system was designed to prevent individuals from cashing out their entire pension fund, the two-pot system will be more of a “lifeline” benefit to younger members as it will take some time to fill the accessible savings pot. However, as with all things money, withdrawing from the savings pot will have a negative compound effect over time.

Saving for retirement is the biggest investment most of us will ever make. Sadly, it can also be very complicated. In this monthly blog, Carina Jooste responds to common retirement questions, ranging from which products are best suited to different circumstances to efficient tax treatments.