This is the final video in a four-part educational series on the two-pot retirement system for GEPF members. Watch the first video here, the second video here, and the third video here. This video looks at the benefits you will get at retirement, and how withdrawing from your savings pot will affect those benefits.

When the two-pot retirement system is introduced on 1 September, one-third of future pensionable service will be allocated to a savings pot and two-thirds to a retirement pot.

Savings pot: The funds earned in the savings pot will be accessible before retirement. At retirement, any funds (service years) that have not been withdrawn will be used towards calculating your lump-sum gratuity. The gratuity will be based on 3 times 6.72% of salary for each year of savings service.

Retirement pot: Funds in the retirement pot cannot be accessed before retirement and must be used to purchase an annuity income at retirement. The pension will be based on 1.5 times 1/55 of salary for each year of retirement service. In addition, the supplementary pension of R360 will be payable.

Vested pot: The new treatment of pensionable service does not affect your existing retirement benefits earned prior to 1 September 2024. The pensionable years of service accumulated up to 31 August are referred to as vested service and will be ring-fenced in a vested pot with the same rules as applied prior to 1 September 2024. The vested pot will provide both a gratuity and a pension as currently is the case. The gratuity will be based on 6.72% of the salary and vested service, and the pension will be based on 1/55 of the salary for each year of vested service.

At retirement these “pots” will all play a different role in how your benefits are determined.

An example

You have 25 years of vested service (up to 31 August 2024), and retire ten years later, on 1 September 2034. Let’s assume that the your final salary is R300 000. (Note that we have ignored seeding capital.)

Scenario 1: You don’t make any withdrawals

At retirement,you have 35 years of pensionable service:

• Vested service = 25 years
• Retirement service = two-thirds of 10 years post 1 September 2024 = 6.667 years
• Savings service = one-third of 10 years post 1 September 2024 = 3.333 years

Gratuity calculation

On retirement, the amount of your gratuity will be calculated based on the years of vested service and the years of savings service, according to the formula explained above:

Vested pot: (6.72% x 25) x 300 000 = R504 000
Savings pot: (3 x 6.72% x 3.333) x 300 000 = R201 600
Total gratuity: R504 000 + R201 600 = R705 600

Annuity calculation

Your annuity will be based on pensionable service made up of years of vested service and years of retirement service.

Vested pot: (1/55 x 25) x 300 000 = R136 364
Retirement pot: R360 + (1.5 x 1/55 x 6.667) x 300 000 = R54 905
Total annual pension: 136 364 + 54 905 = R191 269 per annum (R15 939 per month)

So, at retirement you receive a gratuity of R705 600 and an annual income of R191 269 (R15 939 per month).

Current system comparison

Now let us compare the benefits that would have been paid under the current system using the current formula. You would have a total of 35 years of pensionable service at retirement and would be entitled to the following benefits:

Gratuity: (6.72% x 35) x 300 000 = R705 600
Annual pension: R360 + (1/55 x 35) x 300 000 = R191 269

As you can see, if you don’t make any withdrawals from the savings pot, you will get the same gratuity and pension as if the two-pot system had not been implemented.

Scenario 2: You withdraw all funds in the savings pot

Now let’s look at what would happen if you cashed in your savings component before retirement. Remember, if you have withdrawn the funds from the savings pot prior to retirement, then the years of service in the calculation will be reduced.

If you had exhausted the balance in the savings pot at the time you retire, you would now only receive the vested service gratuity of R504 000. This means the gratuity would be reduced by R201 600. You would still receive a total pension of R191 269 per year. So any withdrawal from the savings pot will reduce the gratuity you will receive at retirement.

Early retirement and the two-pot system

The same formula will apply to early retirement in terms of how the gratuity and annuity are calculated based on vested service, savings service and retirement service.

The only difference is that for early retirements, the gratuity and pension benefits are reduced further by the early retirement penalty.

Taxation at retirement

Gratuity: At retirement, the retirement tax tables would apply. The first R550 000 of the gratuity would be paid tax free, after which a sliding scale applies.

Annuity income: A member’s annuity income will be taxed according to the personal income tax tables. Taxpayers above the age of 65 have a lower personal tax rate.

Member questions

How does the two-pot retirement system work if I get divorced?

The GEPF can only carry out a court order. The fund would need to receive a divorce court order to pay out the member’s pension interest to the ex-spouse. Once the new retirement system is implemented, the funds will be withdrawn equally from each pot. For example, if the ex-spouse is entitled to 50% of the retirement benefit, this would entitle the ex-spouse to 50% of the vested pot, 50% of the retirement pot, and 50% of the savings pot.

How will death benefits be calculated?

If a member passes away in service, on death all pots are available to be distributed to the deceased beneficiaries according to the nomination list.

This article first appeared in City Press.