The Two-Pot Retirement System Update
The two-pot retirement system is a proposed reform that aims to improve the preservation of retirement savings in South Africa. It is expected to take effect on 1 March 2024, according to the revised 2023 Draft Revenue Laws Amendment Bill and 2023 Draft Revenue Administration and Pension Laws Amendment Bill published by the Treasury on 3 December 2023.
The two-pot system will divide the retirement savings of members of defined contribution funds, provident funds, and pension funds into two components: a retirement component and a savings component. The retirement component will hold at least two-thirds of the contributions made by the member and the employer, and will only be accessible at retirement. The savings component will hold up to one-third of the contributions, and will allow one withdrawal per tax year, subject to a minimum of R2,000 and taxed at the marginal income tax rate of the member.
The purpose of the two-pot system is to encourage members to preserve their retirement savings for their old age, while also providing some flexibility and liquidity in case of emergencies or financial hardships. The Treasury hopes that this system will reduce the reliance on social grants and improve the living standards of retirees in South Africa.
However, the two-pot system will not apply to all retirement funds in South Africa. The following funds are excluded from the reform:
Legacy retirement annuity funds, which are policies entered into before 1 January 2022 that have an insurance component and no concept of a fund value.
Defined benefit funds, which pay out an amount on retirement according to a predefined formula and do not depend on contributions made by members.
For members of these funds, the current rules and regulations will continue to apply.
Another important aspect of the two-pot system is the seeding option, which allows members to transfer some of their existing retirement savings into the savings component when the system is implemented. The seeding option is limited to the lesser of 10% of the vested component (the retirement savings accumulated before 1 March 2024) or R25,000. This means that members can access up to R25,000 of their existing savings from 1 March 2024, but only if they have at least R250,000 in their vested component.
The seeding option is meant to provide some initial funds in the savings component, as it will start with a nil balance on 1 March 2024. However, the Treasury advises members to exercise this option only as a last resort, and to try to preserve their savings for retirement as much as possible.
The two-pot retirement system is a significant change in the retirement landscape of South Africa, and it has implications for both members and fund administrators. Members should familiarize themselves with the new rules and regulations, and consult with their financial advisors to plan their retirement strategies accordingly. Fund administrators should prepare for the operational and administrative challenges that the system will bring, and communicate with their members to ensure a smooth transition.
The Treasury has invited public comments on the draft bills until 14 January 2024, and will consider the feedback before finalizing the legislation. The two-pot retirement system is expected to be enacted by Parliament by February 2024, and to come into effect on 1 March 2024.