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.

The post Understanding South Africa’s Two-Pot Retirement System: Financial Feast or Famine? first appeared on Moneybetter.

Retirement Annuities: Save now, pay less tax, and thank yourself later

Most of us know that we should be saving for retirement, but the reality is that South Africans aren’t doing nearly enough of it. According to the National Treasury, only 6% of South Africans will have saved enough money to retire comfortably. That alarming statistic means that most citizens will have to work long after retirement age, or will have to rely on their family or the state in order to survive.

Because of this, the government has created a number of incentives in an attempt to encourage South Africans to save more. The tax-friendly rules around Retirement Annuities (RAs) are one such incentive, making them an attractive investment vehicle in helping individuals ensure that they are able to retire with an income. RAs also have other advantages, which are discussed below.

But first, let’s get the definitions out of the way. What is an RA? It is a tax-friendly investment that allows you to save for retirement, and will give you a guaranteed monthly or annual income once you have retired. From age 55 you’ll be able to take one third of your RA savings as a cash lump sum, while the remainder will be used to pay you a monthly/annual income.

The advantages of Retirement Annuities

1.Tax deductible

Of course RAs are important because they help individuals save for retirement, but one of their biggest plusses is that they are pre-tax deductible. That means that you make savings immediately because you make contributions with earnings that you have not yet paid tax on. And so by contributing to an RA you build both your own investment, while getting a tax benefit – a win win.  

Let’s have a look at an example of how this might work in practice.

Tumi earns R500 000 per annum, and contributes 20% to an RA. Robert earns R500 000 per annum, and doesn’t contribute to an RA.

Using the current SARS tax tables[BP1] , this is how much tax both would pay:

(* Note that for simplicity’s sake, this table doesn’t include other potential income sources or tax deductible expenses.)

This table clearly illustrates that even though Tumi and Robert earn the same annual salary, Tumi pays R31 565 less tax than Robert because of her RA contribution. And she also saves R100 000 annually towards her RA, which she can access when she is 55 years old. Of course Robert might be putting some of his R500 000 salary towards savings, but because it isn’t an RA, he isn’t benefitting from the reduced tax.

Note that South Africans can contribute up to 27.5% of their total income annually to an RA (with the amount being capped at R350 000) to benefit from the tax refund.

2.No tax on the growth of your RA

There is no tax on the growth or income of your RA investment. For other investments (such as buying a house or owning shares) you’ll eventually pay capital gains tax on the growth of the investment. But with an RA, you do not pay capital gains tax on any growth of the investment. Similarly with income (salary, rental incomes, interest etc) you will pay income tax. Again, there is no tax on any dividends or interest received throughout the duration of your RA’s lifespan.

3.A forced saving

Because your RA is only accessible at age 55 it means that it is a forced saving. Not being able to access the money could be seen as a negative, but having money out of temptation’s way is also one of the best ways to ensure that you do have a nest egg later on.

“One could say that the limitation of access to the product until the age of 55 is a possible downside. Life can be unpredictable and in some situations access to liquid assets is important,” says DMA’s Christopher Clarke. “Investors should be aware that an RA is locked until the age of 55 unless certain criteria is met, like a disability or one is emigrating. Although this is a downside to some people, I find the limitation of access an upside as saving and investing can take a lot of self-discipline which at times can be difficult to manage.”

What is an RA invested in?

Your RA can be invested in a variety of ways. But Regulation 28 of the Pension Funds Act does offer rules around maximum exposure to asset classes, eg a 75% maximum exposure to equities, 25% to property and 30% to offshore investments

“How you choose to invest your RA can vary depending on how much control you wish to have. Various platforms allow you to choose the fund or portfolio that you wish to follow. Other platforms or providers allow you to define your retirement objectives, risk-taking ability and general willingness to take risk with the outcome being a more tailored investment strategy to meet your goals. Lastly, investors can always engage with advisors should the need arise to seek help with investment choices within a retirement annuity account,” says Clarke.

Note that if you’re paying towards an RA via your salary/company, you can also invest in a separate RA if you want to maximise the amount you’re paying in this way. You can pay towards your RA monthly, or you can top up your RA annually before the end of the tax year – or do both.

And finally, despite not being able to access your funds until age 55, you are able to make changes if you are unhappy about its performance.

“It is important to note that you are the ultimate beneficial owner of an RA,” says Clarke. “If you are not happy with how an asset manager is managing the assets within your RA, it should be encouraged to find an asset manager who does meet your financial goals, risk capacity and tolerance. There are no tax implications to transfer your retirement annuity to another platform or provider.”

The post Breaking down the benefits of an RA first appeared on Moneybetter.

Saving vs Investing. What’s the big difference?

Give yourself the knowledge about how to start thinking differently about your money. Understand the basics of saving vs investing. They both have a role to play in your financial security.

A note upfront. This article doesn’t promise you the lifestyle of your dreams, with a sports car in your garage and caviar on the dining table. 

Don’t get us wrong, though. We’re not saying you can’t achieve wealth and security with the right financial decisions and hard work. 

What’s the downside between the two?

For every up, there’s a down. Newton taught us that hundreds of years ago, and it’s equally true today. There are downsides to both savings and investing.

Let’s first look at savings:

1. Saving takes discipline and commitment. Suppose you don’t secure your cash well and instead give yourself easy access to it. In that case, you may be squandering your money on impulsive behaviours, like that stylish new outfit you’ve just seen in the mall.
2. Savings will not earn you high interest. If you factor in inflation and currency fluctuation, may leave your capital lower than when you deposited it.
3. You’ll miss out on market gains and potentially substantial compound interest.

Now let’s take a look at the negatives of investing:

1. Investment accounts are related to market volatility. What that means to you, the investor is that the value of your investment can easily be affected by an economic crisis or market problems.
2. There is a higher risk that you may lose all or part of your capital for investment if you invested in property and the developer goes bust.
3. Remember, a fund’s past performance doesn’t guarantee its future performance, so you must think long before committing your hard-earned money.
4. You also may pay a penalty for withdrawing the money too soon, depending on the conditions of your investment. Investment accounts usually attract higher fees.
5. You’ll also usually need a minimum lump sum deposit for an investment account.

Remember, the number one rule in deciding what wins in savings versus investing is what you, the one with the money, want to do with it and how prepared you are to do that. 

So, consider your risk tolerance, financial requirements, and when you may need to access the money. 

What is the difference between saving vs investing?

Saving is when you put money away in a safe place, like a bank account, to use in the future. The money could be a rainy-day fund or the beginning of a deposit on a new house.

Investing is when you place your money in an investment for a goal, like retiring, hoping that your money will grow. Remember, there’s no safety cushion with investing. Generally, the higher the risk, like a share or property portfolio, the higher the potential reward. But it’s also vice-versa.

What are the benefits of saving and investing?

The benefits of Saving:

• Savings are typically no-risk.
• Your money remains liquid.
• You put it into an account and earn interest on the amount.
• Your initial capital is guaranteed.
• It’s more easily accessible, depending on the account you choose.
• A notice or a fixed deposit could protect you from impulsive withdrawals.
• The longer-term saving deposit will generally offer you more interest.
• Your saving isn’t subject to market volatility.

The benefits of Investment:

• Aimed at building wealth.
• Potential for higher returns than savings.
• You have more say in how your money is used in investing, e.g. property or the stock market.
• The longer you invest, allows your interest to compound, which is crucial in growing your wealth.

As you can see, there are benefits and downsides to both sides of the coin.

Let’s sum up the argument of saving vs investing.

Investing can generate better returns than savings accounts, but that comes with risk, especially over shorter time frames. On the other hand, savings are more secure but less likely to earn you higher interest.

A few words to the wise.

Be empowered and understand where to put your money. Don’t be taken in by flashy offers or unrealistic interest rates. Sound too good to be true? It probably is.

Another essential thing to remember is that being a saver or an investor is better than being neither. 

Finally, remember that some form of savings is vital. Experts suggest a safety net of anything from three to six months of expenses to play it safe. You want to be sure that if something does happen where you urgently need cash, it’s there.

Now, that’s peace of mind!

The post Investing vs Saving | Understand The Basics | Moneybetter first appeared on Moneybetter.