In last week’s article, we unpacked how and when retirement fund members are currently allowed to withdraw from their retirement funds to help us better understand why the new two-pot retirement system is being introduced. By understanding the current withdrawal rules, we also have a better context in which we can contrast the rules of the new two-pot retirement system, which will help you understand the impact of the changes on your finances.
So let us unpack how the new two-pot retirement system will work.
It is important to firstly understand that all contributions made to your retirement products, up until 31 August 2024, will be treated according to the same rules as before. Many investment houses are unofficially refereeing to this as the third pot which they are calling the vested pot.
All contributions that members make to their retirement products from 1 September 2024 going forward will be split up into two pots. In the first pot, known as the retirement pot, two-thirds of contributions will be saved. Funds in this pot can only be used to buy an annuity at retirement which will provide an income to you throughout your retirement years. If the value of this pot is R165,000 at the time of retirement, an exemption is allowed and the full value can be withdrawn in cash, subject to tax.
The second pot is the emergency savings pot. One third of all contributions made from 1 September 2024 will be allocated to this pot. Members are allowed to make one withdrawal, subject to tax, from this pot each tax year. The minimum allowed to be withdrawn is R2000 while the maximum is as much as is available in this pot. At retirement, the member can withdraw only what is left in this pot in cash, subject to tax, or they are also allowed to use the funds in this pot to buy an annuity.
It is also important to know that on the 1st of September 2024, 10% of the value in your retirement product as of the 31st of August, capped at R30,000, will be transferred into your emergency savings pot. This once off event is called seeding and will allow members to have some funds available in the savings pot to access during this current tax year should the need arise.
Note that the two-pot system will work the same for all retirement fund members regardless of the product. This means that retirement annuities, provident, pension and preservation funds will all be governed by these same rules going forward.
There has been a misconception that SARS has implemented the two-pot system as a way to increase their revenue. This is completely inaccurate, and it is important to understand that nothing has changed with regards to the tax legislation regarding contributions and withdrawals. This means that contributions to retirement products will continue to be deductible from your income tax payable, while withdrawals are taxed according to the tax tables. Just as before there is a separate tax table for withdrawals made before retirement, that have more significant tax payable than the tax table that apply to withdrawals made at retirement. It is very important to understand that when tax on withdrawals is calculated, all previous withdrawals are considered which will impact which tax bracket is used to calculate tax payable. This is true for not only withdrawals before retirement but also for any withdrawal made at retirement.
The new two-pot system is certainly going to make funds more accessible to retirement fund members before they are allowed to retire from these funds, which should provide an alternative to those that land on financial hard times. It is however important to remain disciplined and to see this as a last resort considering that the implications are lasting. Retirement funds should always be seen firstly as a retirement vehicle to save towards retirement rather than a savings account.
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