Balancing Access and Security: Navigating the Two-Pot Retirement System

Feel free to reach out to PSG Wealth adviser  Bernice Barnard directly.

The Two-Pot structure explained

The two-pot system will divide your retirement contributions, from 1 September 2024 onwards, into two distinct components:

1. Savings pot: This pot provides limited access to funds before retirement and is intended to offer a financial buffer in exceptional circumstances such as financial emergencies or significant life events. One-third of your retirement fund contributions will be allocated to this pot. You will be allowed one withdrawal per tax year (between 1 March and 28 February annually). Upon implementing the two-pot system, your savings pot will be “seeded” by transferring 10% of the value in your vested pot up to a maximum of R30 000 to your new savings pot. You will be able to transfer capital from your savings pot to your retirement pot; however, it is essential to note that when you do so, the transfer will be final, and the capital will no longer be accessible.

• Access: While you will be able to withdraw from the savings pot, it’s generally advisable to consult with your financial adviser before doing so and to explore all other options at your disposal first. Withdrawals can undermine your long-term savings goals and should be reserved for true emergencies. You will be allowed to withdraw a minimum of R2 000 and a maximum of the total value available in your savings pot. It is imperative that you understand the impact that a withdrawal from this pot before retirement may have on your post-retirement income.
• Taxation: Withdrawals prior to retirement will be subject to income tax. Your withdrawal amount will be added to your taxable income and taxed at the marginal tax rate. Withdrawals will only be allowed with a tax directive. Fund administrators can only apply for a tax directive if you have a valid income tax registration number, and tax will be deducted before paying your withdrawal benefit. The lump sum taken from this pot at retirement will be taxed according to the SARS retirement lump sum tax table.

2. Retirement pot: This pot is intended to secure funds specifically for retirement. Two-thirds of your retirement fund contributions will be allocated to this pot.

• Access: Funds will only be accessible at retirement, and 100% of the capital must be used to purchase an annuity to provide you with an income after retirement. A full withdrawal will only be allowed if the value in the retirement pot (plus two-thirds of the vested component) is below the amount prescribed by legislation at the time of your retirement, subject to tax.
• Taxation: Seeing that you will not be able to withdraw from this capital at retirement (unless it falls below the amount prescribed by legislation), only your annuity income will be subject to tax at your marginal tax rate.

All benefits accumulated prior to 1 September 2024 (vested component) will retain their status and remain subject to the old fund rules.

Members aged 55 years or older on 1 March 2021 who still contribute to provident funds will not be included in the two-pot system but will have the option to participate in the two-pot system. They can continue their contributions according to the fund rules prior to 1 September 2024. However, if they elect to participate in the two-pot system, the decision will be final, and all future contributions will be allocated according to the new fund rules. All benefits accumulated prior to 1 September 2024 will retain their vested rights.

Considerations

For investors, it’s crucial to strike a balance between immediate financial needs and long-term retirement security.

Strategic use of the savings pot: While the savings pot offers flexibility, it’s important to use it judiciously. Over-reliance on this pot can compromise your future financial stability.

Tax efficiency: Understanding the tax implications of withdrawing from your savings pot prior to and post-retirement is vital. Pre-retirement withdrawals have the potential of pushing you into a higher tax bracket, depending on the amount you withdraw from this pot.

Retirement security: The retirement pot ensures that a portion of your retirement savings is protected until retirement, which is critical for maintaining financial security in your retirement years. We recommend that you consult your financial adviser to assist you in developing a plan that prioritises preserving these funds while addressing your immediate financial needs responsibly.

Navigating the opportunities and complexities of the new two-pot system is made easier with the guidance of a financial adviser. They can provide tailored advice to help you make the most of the system’s benefits while avoiding potential pitfalls. Your adviser can help you gain a deeper understanding of the system, optimise your investment strategy, and develop a comprehensive plan that balances your immediate financial needs with your long-term retirement goals. Furthermore, a personalised approach ensures that you receive the best advice for your specific circumstances, helping you to achieve financial security and peace of mind.