YOU AND THE TWO-POT SYSTEM
Last year we wrote about the forthcoming Two-Pot retirement system which was said to revolutionise South Africa’s retirement savings industry. At that stage we felt that it was a great idea but there was a lot of uncertainty about how it would be implemented. Fast forward half a year and now the Revenue Laws Amendment Bill has been signed by President Ramaphosa and the Two-Pot system is set to be implemented from 1 September 2024. The amendment law introduces the Two-Pot retirement system to address the concerns related to lack of preservation before retirement and lack of access to retirement funds by households in financial distress. In this month’s Financial View, we look at just how you may be impacted.
In the statement released by the Presidency following the signing of this Bill they state: “The two-pot retirement system is a reform that will allow retirement fund members to make partial withdrawals from their retirement funds before retirement, while preserving a portion that can only be accessed at retirement to help improve retirement outcomes. This means members need not resign to access part of their retirement benefit if they are in financial distress. This reform will come into effect on 1 September 2024.”
Whilst it is called the Two-Pot system the reality is that it is a three-component system. Understanding the differences of each individual component is important. The three-components apply to all retirement savings products, whether retirement annuities, pension funds, provident funds or preservation funds.
Vested Component
The balance in your retirement savings as of 31 August 2024 will be allocated to your vested component. The vested component maintains its current rules (including those related to accessibility and tax) so depending on whether you are invested through a pension fund, a provident fund or a retirement annuity that would influence what you are allowed to do with your vested component.
10% of your vested component (up to a limit of R30 000) will serve as seed capital and will be transferred to your savings component.
Your vested component will remain invested in your existing investment strategy and continue to enjoy growth.
No future contributions are allocated to your vested component.
Savings Component
This is the component that has received the most attention in the press as you will be able to make one annual withdrawal from your savings component.
Your savings component will be initially funded with the seed capital received from the vested component (your existing retirement savings). This means that you will start with a balance of 10% of your retirement capital, limited to R30 000, in your savings component.
1/3rd of your contributions to your retirement savings after the effective date of 1 September 2024 will be allocated to your savings component.
Retirement fund members will be able to make an annual withdrawal from the savings component (we will touch more on that later).
Your savings component will be invested in your existing investment strategy to enjoy growth.
Retirement Component
This is the component that creates forced preservation. 2/3rds of your contributions to your retirement savings after the effective date of 1 September 2024 will be allocated to your retirement component.
You can only access your retirement component at retirement and the full balance has to be annuitized, unless at retirement age, your account value is below the deminimus level. You will not be able to access any lumpsum from the retirement component.
Your retirement component will be invested in your investment strategies to enjoy growth.
Accessing your savings component
You are able to make only one withdrawal from your savings component each tax year. The withdrawal amount has to be at least R2 000 in value and is limited to the amount in your savings component which would be the amount contributed to it plus investment growth.
Any withdrawal from your savings component will be treated as taxable income and subjected to tax at your marginal tax rate, so accessing your savings component will generally be done at a higher tax rate than previously applied to retirement savings withdrawals.
Most product providers have indicated that they have implemented technology and setup call centres to deal directly with fund members who wish to access their savings component. This will be done without the involvement of the intermediary so Magwitch will not be involved in your withdrawal. You would deal directly with your product provider in the method that they have stipulated.
The product providers have given guidance that withdrawals will take time because of the need to get tax directives from SARS and process the sheer volume of withdrawals that they anticipate. We have heard that withdrawals could take up to 4 months to be processed so you will need to take this into account and it will not really be suitable to meet immediate cash requirements.
We really appreciate that everyone is currently under financial stress. High interest rates tend to limit disposable income placing pressure on all of us. If you do need to access funds, you will be able to do so from your savings component but due to the length of time to process the withdrawal there would still need to be some planning. Withdrawing any amount from your savings component will influence/ reduce your retirement capital when you hit retirement age.
Discovery have created a fantastic calculator to see the impact on withdrawing from your savings component.
Older than 55 – only applicable to provident fund members
This is where it starts to get a little complicated. If you were older than 55 on 1 March 2021 (so a full 3.5 years before implementation) and a member of a provident fund, and still a member of the same fund on 1 September 2024 you will automatically be excluded from the two-pot system. So, if you are now a 58-year-old provident fund member you are excluded unless you specifically opt in. Because of the tax and accessibility rules it will not be in your interest to opt in and rather retain your existing vested provident fund rights.
Conclusion
We think that the Two-Pot system is a step in the right direction to close the retirement gap in South Africa. Often quoted statistics detail that only 6% of South Africans can retire comfortably, for the balance they just don’t have sufficient retirement capital. Now from 1 September 2024, 2/3rds of each future contribution cannot be accessed and will eventually form part of money that you will live on in retirement.
It does also provide members with the ability to access a portion of their retirement capital well before retirement, however this does have consequences in terms of future growth and on tax. We suggest getting the necessary advice if you are contemplating making a withdrawal, even if we are uninvolved in the withdrawal process. History tells us that where possible, try to avoid withdrawing from your accumulated savings.
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