New two-pot system will take some getting used to for those planning for their post-work lives.
There’s confusion about what the two-pot retirement system is and how it’ll work once implemented on 1 September 2024. South Africans, whether employees or independent earners, typically contribute part of their monthly salary to one or other retirement fund. When they change jobs or become unemployed, any accumulated savings in their fund are paid out to them after being taxed. Unfortunately, the temptation to squander this money on luxuries or necessities is great, and it is seldom reinvested towards retirement. This condition was exacerbated by COVID, when many lost their jobs and used their payout to survive. This was not the first time the problem was recognized. A method for preserving retirement savings while affording members access to a reasonable portion for emergencies has been debated for the last 30 years or more. The two-pot system was developed to offer a rational compromise.
Currently, members have existing savings in their retirement fund from past contributions, called the vested component. On 1 September, two new components – or ‘pots’ – will be introduced into each member’s fund, and all future contributions will be paid into these pots as follows:
- The savings pot will receive one third of the contribution. Members can draw any amount from this pot once a year, provided it is not less than R2,000, and they are limited only by the amount of savings held at the time.
- The retirement pot will receive two thirds of the contribution. Members cannot withdraw from this pot at all, except as a lump sum when they opt to retire after age 55.
- So, for example, for a contribution of R3,000 per month, R1,000 will go into the savings pot, and R2,000 will go into the retirement pot.
Vested interest
On 1 September, 10% of the member’s existing savings (vested component), but not more than R30,000, will be transferred to the savings pot as seed capital, immediately available for members to withdraw. The initial withdrawal can only be as much as the member has in their savings pot and can’t be more than R30,000. But there is no cap on future withdrawals, and members are not compelled to make a withdrawal in any given year.
The remaining vested component is not part of the two-pot system. If a member leaves their employer, the vested component will be paid out after being taxed. Otherwise, it will form part of their lump-sum payout on retirement.
Income earmarked as a retirement contribution is not taxed when it is earned but when the lump sum is paid out in the future. So, when a member withdraws from their savings pot, they’re taking untaxed income that will no longer be used to fund their retirement, rendering the tax on it immediately due.
While the release of the vested component continues to be taxed against SARS’ severance benefit tax tables, savings pot withdrawals are taxed at the member’s marginal rate. In addition, since their withdrawal relies on a tax directive, they must be compliant with SARS before the funds can be released.
Text | Phil Le Feuvre
Photography | PeopleImages.com – Yuri A
Phil Le Feuvre is a South African Reward Association (SARA) member.
For more information, go to sara.co.za.
