The 2-Pot System
When the much-touted Two-Pot System came into effect in South Africa, it changed the landscape of pension assets and legislated changes that had an impact on all South Africans. So what exactly is this new system, how does it work and what are some of the key changes? Let’s take a deep dive into the Two-Pot System and try to answer as many questions as we can.
History
The proposed two-pot system was conceived to address two main challenges (amongst others):
1.The lack of preservation (referred to as “pre-retirement leakage”) where employees withdraw their entire retirement savings before retirement (such as at termination or resignation from an employer)
2. The lack of access to retirement fund savings by members who are in some sort of financial distress, but who cannot access assets within their retirement funds due to fund rules
This access challenge became much more distinct during the COVID-19 pandemic, with COSATU lobbying for members to have access to their retirement savings due to the dire financial position that they found themselves in.
During the February 2021 Budget Speech and November 2021 Medium Term Budget Policy Statement (MTBPS) Speech, the Minister of Finance made an announcement of this intended retirement reform; followed by a discussion document titled ‘Encouraging South African Households to save more for retirement’ published by the NT on 15 December 2021 for public comment.
An intensive consultation process between the National Treasury, business and organised labour where various risks, challenges and consequences were discussed culminated in the policy reflected in the Revenue Laws Amendment Bill (RLAB) published on 29 July 2022 for comment. Once enacted, the bill gave effect to the two-pot system inclusive of:
A Savings Pot (one-third access pot): available in case of emergencies once a year, with a minimum withdrawal of R2,000 (subject to normal marginal tax rates)
A Retirement Pot (two-thirds compulsory preservation): available upon retirement to purchase annuity and subject to a minimum amount of R165 000. This was initially contemplated to have had application from 1 March 2023A
A Vested Pot: where vested rights or fund values (pre-1 March 2023) would not be impacted; and hence the creation of the third pot.
The third iteration of the RLAB which was put before the Standing Committee on Finance (SCOF) on 1 November 2023 provides for:
The seeding amount is to be increased to a max of 10% capped at R30 000
Effective date will be from 1 September 2024
Section 37D deductions to be applicable across all pots. For a full list of what this entails, please follow THIS LINK
On 29 November 2023, the Minister of Finance went to Cabinet to move the PFAB. Cabinet approved the tabling of the PFAB in Parliament.
If this is the Two-Pot System, why are there three pots?
Effective 1 September 2024, all contributions flowing into retirement funds (pension funds, provident funds, preservation funds or retirement annuity funds) must be allocated to two different pots; a retirement pot and a savings pot. All retirement savings belonging to members on 31 August 2024 will be placed in a third pot. This pot is called the “vested pot”.
The Vested Pot:
This pot is made up of your retirement savings on 31 August 2024. This money will be protected, and the two-pot rules will not apply to it. 10% of your retirement savings or R30 000, whichever is the lowest, will be transferred to the savings pot. Members can access this amount from September 2024. This 10% is called the “seeding” amount.
The Savings Pot:
One third of your contributions from 1 September 2024 will go into your savings pot. You can withdraw from this pot once only every tax year. The minimum withdrawal amount is R2 000 and will be taxed at your marginal income tax rate. You will also pay a processing fee.
The Retirement Pot:
Two thirds of your contributions from 1 September 2024 will go into your retirement pot. You can only access this pot at retirement and must use it to buy a pension product.
What are the tax implications for withdrawal from the Savings Pot?
If you choose to withdraw from your Savings Pot in any given year, you will be taxed at your marginal tax rate. The danger here is that taking from this pot could potentially put you into a higher tax bracket for that tax year, so caution is necessary to ensure you do not end up paying more tax on all your earnings.
What are the tax implications at retirement?
There are too many considerations for a short answer here. Tax and retirement planning are still essential for ensuring your legacy. Speak to one of the friendly PWM advisors for more information on this.
A Practical Example:
Bongani is 35 years old. His current retirement savings is R50,000
On the 1st of September 2024, 10% of his retirement savings (R5,000) was transferred to his Savings Pot (“seeding” amount).
Bongani now has:
R45,000 in his Vested Pot
R5,000 in his Savings Pot
00 in his Retirement Pot
With the Savings Pot, Bongani can:
Withdraw the R5 000 from his Savings Pot (subject to tax).
Leave it to grow – he can access the money in his Savings Pot once per tax year for emergencies.
Avoid withdrawing it until retirement. At retirement, he can choose to receive it as a lump sum (subject to tax).
Bongani may not draw from the balance of the Vested Pot, and it will be treated with the same rules as previously (i.e. he may not access it until he retires, resigns, is terminated or is retrenched). The Two-Pot rules do not apply to this pot.
All future contributions will be split between the Savings Pot (33.33%) and the Retirement Pot (66.66%). Nothing further will be added to the Vested Pot.
At retirement, Bongani can:
Take all or some of his Savings Pot as a cash lump sum (subject to tax).
If he does not take all or some of the Savings Pot, he can use it along with the Retirement Pot and the Vested Pot, to buy a pension product
If the amount of his Vested Pot that must be annuitised plus his Retirement Pot is less than R165 000, he may withdraw the full amount (subject to tax).
Is anyone exempt from this new system?
In short, yes. If you have been a member of provident and provident preservation funds since before 1 March 2021, and you were 55 or older on that date, you were automatically excluded from the implementation of the two-pot system, and it would not have had any impact on you for this specific investment. You are, however, allowed to opt in if you would like to.
Sources: South African National Treasury, Financial Sector Conduct Authority, Cedar Employee Benefits and Consulting, Momentum, Investec.
