The new two-pot retirement system is coming into effect on the 1st of September and many South Africans may be feeling overwhelmed trying to get their heads around the changes coming. Many might feel that trying to understand changes, despite not being completely up to speed with the current rules of retirement funds, makes it difficult to understand how it will impact their lives and choices. In this week’s article, we will unpack the current rules that apply to retirement funds to help set up a framework in which we will then, in next week’s article, discuss how the new two-pot retirement rules will impact you and your retirement funds.
Table of Contents
The changes that the new two-pot retirement system will be introducing are essentially about changing how and when members can get access to their retirement funds before they are allowed to retire from them. The need for these changes comes as many South Africans are struggling to make ends meet. These new changes will allow them to get access to some funds saved in their retirement products, during times of desperate financial need, to ensure that they don’t have to turn to expensive debt that can easily turn into an unsustainable situation.
Considering that the changes will be around withdrawals, let us look at how each type of retirement fund’s current withdrawal rules work:
Provident and Pension Funds
You will only be able to contribute to either a provident or a pension fund through your employer, therefore you have to be formally employed to do so. Before 1 March 2021, members of provident funds had the option of withdrawing the entire value of their savings in their provident fund in cash, subject to tax, at retirement. Pension fund members on the other hand, could only withdraw up to one-third of their funds at retirement, subject to tax, while the remainder had to be used to buy an annuity. The rules of a provident fund have however changed, and all contributions made to the fund after 1 March 2021 will also be split into one-third that can be withdrawn in cash at retirement, subject to tax, while the remaining funds must be used to buy an annuity. But what about withdrawals made before retirement? Only when a member leaves their employment, do they have the option to either withdraw the entire or partial value of their provident or pension fund, subject to tax; leave it in the fund; or transfer it to a preservation fund. This means that in order to get access to those funds, should a member need it, they have to resign from their employer.
Preservation Funds
As just mentioned, a preservation fund is used to keep your provident or pension fund contributions until you are allowed to use the funds to retire. Funds transferred from a pension fund will be held in a pension preservation fund while the funds transferred from a provident fund will be held in a provident preservation fund. The withdrawal rules for each type of provident fund at the time of retirement will be the same as for pension and provident funds respectively. Before retirement, however, a member is allowed to make one, full or partial withdrawal from their preservation fund, subject to tax.
Retirement Annuity
A retirement annuity is a retirement product that people, who aren’t formally employed, can use towards saving for their retirement. Funds invested in a retirement annuity can not be withdrawn before retirement and at retirement, members are only allowed to withdraw up to one-third in cash, subject to tax, while the remaining value of the fund needs to be used to buy an annuity.
Revisiting the current fund rules helps us better understand why changes are needed. Although in an ideal world, retirement savings are not meant to be used before retirement, we all know that life can be unpredictable. Allowing retirement fund members to get access to some of their retirement savings before they are 55 years old, will greatly reduce financial stress and hardship. In next week’s article, we will look at how the new two-pot retirement system will work to ensure that you are informed about how the changes will impact you.
