Understanding South Africa’s Two-Pot Retirement System: Financial Feast or Famine?

Picture this: You’re in a restaurant, scanning the menu, and the waiter asks if you’d like to split your meal into two courses. One is for now—your immediate hunger fix—and the other is for later when you’re ready to savour the flavours. That’s essentially what South Africa’s new two-pot retirement system is offering, but instead of food, it’s all about your hard-earned money.

On July 21, 2024, President Cyril Ramaphosa put pen to paper and officially signed the Pension Fund Amendment Bill into law. And just like that, the two-pot retirement system was born. This new system is designed to help you balance the here and now with your future, offering financial flexibility while keeping your retirement intact. Sounds great, right? But, as with any good deal, there might be a catch, especially when you factor in our good friend, the taxman.

What is the Two-Pot Retirement System?

So, what exactly is the two-pot system? Let’s break it down into digestible pieces.

1. The Vested Pot: Your Pre-two-pot Savings

This is where all your pre-September 2024 retirement savings will be kept. Think of it as your old-school savings account—same rules, same growth, nothing really changes here. But here’s the twist: a “seeded amount” of 10% (capped at R30,000) will be taken out of this pot and poured into the new Savings Pot, to get things started. After that, the Vested Pot will keep growing, but you can’t add any more contributions to it.

2. The Savings Pot: Your Financial lifeline

Starting from 1 September 2024, you can dip into this pot if you need a little extra cash. Between then and 1 March 2025, you can withdraw a minimum of R2,000 and up to 10% of your retirement savings, capped at R30,000. If you have less than R2000 after your withdrawal, you can still withdraw the remaining amount in the same tax year.  After 1 March 2025, one-third of all future contributions will go into this pot, ready for you to access once a year in case of financial emergencies. But remember, this pot isn’t for that new gadget you’ve been eyeing; it’s meant to be your financial lifesaver, and any withdrawals will be taxed at your marginal income tax rate—the rate applied to your highest portion of income. So, the more you earn, the more tax you’ll pay on these withdrawals. It’s important to consider this, as taxes could significantly reduce the amount you get when you need it most.

3. The Retirement Pot: Locked away until retirement.

The remaining two-thirds of your contributions will be locked away in this pot, safely out of reach until retirement. Think of it as your money tree—you nurture it now so it can provide you with a steady income stream when you retire. The only way to get your hands on this pot before retirement is if you leave South Africa for good or if your total savings fall below R165 000, you can then withdraw that amount at retirement instead of having to purchase an annuity.

4. Provident Fund Members aged 55+: you have a choice.

If you were 55 or older by March 1, 2021, and you’re still with your provident fund by September 1, 2024, you have options. You can either keep your savings in the Vested Pot, sticking to the old ways or jump on the two-pot bandwagon. If you go with the latter, your funds will be split between the Savings Pot and the Retirement Pot, giving you the flexibility to withdraw a bit before retirement if needed. Bear in mind that this choice is irrevocable, once you choose it you are locked in till retirement.

What You Should Know Before Making Withdrawals

There’s been quite a buzz about this two-pot system, especially on social media. Some folks are already planning to use their Savings Pot to pay off debts—a smart move in line with the government’s recommendations. But before you start dreaming about what to do with that money, let’s talk taxes. Here’s a simple calculation for a 34-year-old male with R334,844 in his retirement account, earning a gross income of R28,000, who wants to withdraw R18,000 from his Savings Pot.

From September 1, 2024, 10% (capped at R30,000) of his retirement account will be used to jump-start his Savings Pot.

This will leave him with R304,844 which will be kept in the Vested Pot until his retirement. This money will remain untouched and continue to grow.

Withdrawal Amount: R18,000

Marginal Tax Rate: 26%

Your financial institution will also charge an administration fee for the withdrawal. The predicted amount is R100 – R600. For this calculation, let’s go with R350

To find out how much tax will be deducted:

Tax Payable=Withdrawal Amount×Marginal Tax Rate

Tax Payable=R18,000×0.26=R4,680

After the tax is deducted, here’s what he’ll receive:

Net Withdrawal=Withdrawal Amount−Tax Payable

 R18,000−R4,680=R13,320

Total Withdrawal Amount=R13,320-Admin fee

Total Withdrawal Amount= R13,320-350

R12,970 is the amount he will receive from a R18,000 withdrawal.

This withdrawal will leave him R12,000 in his Savings Pot. So how can he make up for that withdrawal? Let’s assume his employer contributes 10% of his gross income (R28,000) to his retirement savings each month:

Monthly Retirement Contribution=Gross Income x Employer Contribution

R28,000×0.10=R2,800

Out of this, one-third goes into the Savings Pot:

Monthly Savings Pot Contribution= Savings Pot Contribution Value x Employer Contribution

1/3×𝑅2,800=𝑅933.33

Now, to replenish the R18,000 withdrawn:

Months Required = Monthly Savings Pot contribution/withdrawal Amount

​𝑅18,000/933.33=19.28months

He will need to work for an extra 19 to 20 months after his retirement age to fully replenish the R18,000 withdrawn from his Savings Pot, assuming consistent monthly contributions of R933.33 into the Savings Pot.

Understanding how this withdrawal could impact your overall finances is crucial, so crunch the numbers or get some expert advice before making any decisions. It is also important to check if the institution withholding your retirement has approval to implement the two-pot system and if you owe money to SARS because that will be deducted from your withdrawal amount.

Conclusion

The two-pot system is shaking up how South Africans save for retirement. It’s a delicate balance between giving you some short-term financial wiggle room and ensuring you’re set for the long haul. Keep an eye on how things develop as this system rolls out, and don’t hesitate to get professional advice. After all, your future self will thank you for it.