Over the last few years, National Treasury has been working on introducing the so-called two-pot system for retirement funds.

Recent updates to the draft legislation are open for public comment and have provided further clarity on how the system will work and what it means for your retirement funds. It also answers the question around access to existing retirement fund balances.

All contributions from 1 September 2024 will be divided into two pots. One-third of the contributions will go into a “savings pot” and members will be able to make one taxable withdrawal per year.

Two-thirds will be paid into a “retirement pot” which has to be preserved until retirement and used to purchase an annuity.

For example, if you contribute R1 000 a month to a retirement fund, R333 goes into the savings pot and R666 goes into the retirement pot. The savings pot can only be accessed once a year, and only once the balance has reached R2 000. If you have multiple retirement funds – for example you are contributing to a company retirement fund as well as a personal retirement annuity – you can make an annual withdrawal from each of these funds.

The balance that has accumulated in your retirement fund up until 31 August 2024 will be kept in a separate “vested pot”. The same rules that currently apply to retirement funds will apply to that vested pot.

In other words, it is not subject to compulsory preservation when you change jobs, but you cannot access it before retirement unless you resign.

How much of my current retirement fund value can I access from 1 September 2024?

Technically the savings pot balance on 1 September 2024 would be zero. Treasury’s draft legislation only allows a withdrawal once the savings pot balance reaches R2 000. It would take time to build up sufficient savings to withdraw.

However, in recognising that many fund members may need emergency access to their funds, Treasury has recommended that members be allowed to transfer funds from their vested pot as “seed capital” into the savings pot. This amount is set at 10% of the fund balance, with a maximum of R30 000.

For example, a member with a fund balance of R100 000 on 31 August 2024 would be allowed to transfer R10 000 (10%) to their savings pot which would then be available for withdrawal. A member with a fund balance higher than R300 000 would not be able to tansfer more than R30 000 to their savings pot.

Will my withdrawals from the savings pot be taxed?

Any withdrawal from the savings pot will be added to your taxable income and taxed at your marginal tax rate. The savings pot is envisaged to help cover emergencies, rather than to fund one’s day-to-day lifestyle. It is in your best interest to leave those funds for a real emergency.

What happens if I am retrenched? Would I be able to access all the funds?

If you are retrenched, you would be able to access all the funds in your vested pot (the balance up until 31 August 2024). In terms of the funds that accumulate in the two-pot regime, the savings portion would be fully accessible. The treatment of the retirement pot on retrenchment is still to be finalised and will be part of the second phase.

Are government employees included in the two-pot system for retirement funds?

All defined benefit funds, which includes the Government Employees Pension Fund (GEPF), will be included in the new regime. However, the GEPF is still to provide input regarding Treasury’s proposal.

Defined benefit funds work differently from the defined contribution funds used in the private sector. Therefore, the way the savings pot is calculated will be different.

Treasury’s proposal is that defined benefit funds will be required to base the allocation according to years of service and adjust accordingly. The fund would calculate the one-third contributions to the “savings component” with reference to one-third of the member’s pensionable service, and the two-thirds contributions to the “retirement component” with reference to two-thirds of the member’s pensionable service.

The amount that will be allowed for seed capital will be similar to the 10%/R30 000 rule but it will be accommodated with a past service adjustment.

Are all retirement funds included?

The new system will apply to all pension and provident funds and most retirement annuities. The one exception are so-called “legacy” retirement annuities. These are retirement annuities which are sold by life insurance companies which have additional features, such as universal life policies with life or lump-sum disability cover.

If you are a member of a retirement annuity provided by a life insurance company, it is best to check with your adviser whether your fund qualifies for the two-pot system for retirement funds.

What if I am 55 years or older?

If you are a member of a provident fund and were 55 years or older on 1 March 2021, you can decide whether to contribute to the new two-pot regime.

You could opt to continue to make contributions into your “vested pot” until you either retire from or leave the fund you were a member of on 1 March 2021. Continued contribution to your “vested component” means you will not be able to contribute to the “savings component” and “retirement component”.

If you decide you would prefer to contribute to the new regime, you would no longer be able to contribute to your vested fund and all contributions would be split between the “savings component” and “retirement component”.

Example of two-pot preservation

The two-pot system for retirement funds is trying to find a balance between improving retirement outcomes while providing members with a lifeline for emergencies.

Research by Sanlam shows that for the average retirement fund member, the long-term outcome will be greatly improved under the two-pot system because it will require members to preserve at least two-thirds of their retirement benefits when changing jobs.

They use an example of Sandra, a young woman who joined a retirement fund at the age of 20 and earns R122 000 a year. If she followed the usual pattern of cashing in her retirement funds when she changes jobs, Sandra would have around R2.7 million at retirement. This assumes she does not change jobs after the age of 50.

In the new scenario, at the age of 24, the two-pot system is introduced. She accesses the savings pot throughout her career as the cash becomes available, and only leaves the retirement pot untouched.

Sandra’s retirement outcome improves significantly: in fact, she is 5.5 times better off, as she manages to accumulate R14.8 million. Sandra does not have to resign from her work to gain access to her retirement assets. She gets access to the savings pot in case of emergencies, while still improving her retirement outcomes.

If Sandra does not access her savings pot during her working life, she would have a massive R19 million at retirement, which shows the power of keeping your savings pot funds invested.

Public comment is open

The public has until close of business on 15 July 2023 to comment on these proposals. Written comments can be sent to National Treasury at mailto:2023AnnexCProp@treasury.gov.za and to SARS at mailto:acollins@sars.gov.za.

This article first appeared in City Press. It was updated on 22 November 2023 to reflect that the amount of funds that can be transfered from the vested pot to the savings pot as “seed capital” was increased from R25 000 to R30 000 in late October 2024. It has also been updated to reflect the new implementation date which moved from 1 March 2024 to 1 September 2024