Understanding South Africa's New Two Pot Retirement System
- Jessica Maruo
- Nov 26, 2024
- 5 min read
Updated: Nov 27, 2024
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Picture this: You're stuck in a financial emergency, desperately needing access to cash in your your retirement savings, but they're locked away until you're 55. Frustrating, right? Well, the new Two Pot Retirement System might just be the game-changer you've been waiting for.
Introduction: A Fresh Approach to Retirement Savings
I remember sitting across from countless people who faced this exact dilemma - choosing between their immediate financial needs and their future security. The new Two-Pot System, implemented in 2024, aims to solve this age-old problem by striking a balance between accessibility and long-term retirement savings.
What Exactly Is the Two-Pot System?
The Two-Pot System is South Africa's innovative approach to retirement savings that splits your contributions into two distinct "pots":
The Savings Pot ( which is 1/3 of your contributions towards your retirement)
Allows limited annual withdrawals
Designed for financial emergencies
Subject to tax deductions (use our free two pot calculator to check how much you will be taxed on your two pot withdrawal)
The Retirement Pot (2/3 of contributions)
Preserved until retirement
Focuses on long-term security
Traditional retirement benefits rules apply
Not accessible even if you resign unlike in the past.
The two-pot system aims to encourage long-term savings by making two-thirds of contributions inaccessible until retirement. This compulsory preservation is expected to significantly improve retirement outcomes compared to the current system where many people cash out their entire retirement savings when changing jobs or at resignation
How does the two pot system work?
Let me break this down with a real-world example. Imagine you're contributing R3,000 monthly to your retirement fund:
Component | Monthly Allocation | Annual Total | Access Rules |
Savings Pot | R1,000 (33.3%) | R12,000 | Once annually |
Retirement Pot | R2,000 (66.7%) | R24,000 | Only At retirement |
A visual representation of how this would work is provided below. Remember every withdrawal under the two pot system will be subject to tax at a marginal rate.
Benefits you need to know about and disadvantages?
Having worked in the financial sector and corporate, I've seen firsthand how this system can benefit different types of savers:
Emergency Access You're no longer totally locked out of your retirement savings when life throws you a curveball. Trust me, this feature alone is worth its weight in gold.
Better Preservation The retirement pot stays untouched even if you resign or get dismissed, ensuring you don't compromise your golden years. As one of my clients recently said, "It's like having a safety net without cutting holes in it.
It is important to also highlight the potential disadvantages of this system:
Reduced Retirement Benefits
While the system allows for emergency access, frequent withdrawals from the savings pot can substantially reduce final retirement benefits. For example:
With no withdrawals and full preservation, a person could potentially receive R17,000 per month in retirement
With moderate withdrawals, this could drop to R14,200
With maximum allowed withdrawals, it could fall further to R11,300
Tax Implications
Withdrawals from the savings pot will be taxed at the individual’s marginal tax rate. This could result in higher tax burdens for those making withdrawals, potentially reducing the net amount received.
Here's something interesting I learned while researching this topic - the tax implications are actually quite favourable compared to the previous system:
Savings Pot withdrawals: Taxed at marginal rate
Annual withdrawal limit: Subject to available balance
Retirement Pot: Maintains existing tax benefits
Practical Example?
Let's walk through some real-world scenario to understand how withdrawals from the Savings Pot would be taxed.
Scenario: Sarah makes a withdrawal of R50,000 from her Savings Pot
Annual Salary: R200,000
Savings Pot Withdrawal: R50,000
Total Taxable Income: R250,000
Tax Calculation:
Base income falls in first bracket (R200,000)
Tax on salary = R36,000 (18% of R200,000)
Withdrawal pushes into second bracket
First R237,100 @ 18% = R42,678
Remaining R12,900 @ 26% = R3,354
Total tax = R46,032
Effective Tax Rate on Withdrawal: ~19.2%
You can always use our free calculator for your specific use scenario
Which funds qualify for the two pot system?
The system applies to the following types of funds: In order to ensure equitability, the two pot system applies to both Government Employees (GEPF) and Private Sector Companies and individual retirement annuities.
Frequently asked questions?
Having spoken to numerous South Africans about this system, here are the most pressing questions I get:
How do I apply for the two pot system?
Registration to the two pot system is automatic upon the signing of the Pension Funds Amendment Bill into law which means the effective implementation date of the two pot system is set as 1 September 2024
How do I apply for the two pot system online withdrawal?
You may apply for the two pot system withdrawal by contacting your pension fund or provident fund administrator. You may use the below links for the popular pension fund providers:
Momentum : Click this link for a step by step guide
Discovery: Login to your Discovery Member Portal for seamless navigation on withdrawal.
Sanlam: Follow this link for guidance
Old Mutual: Send “Hi” to Old Mutual’s channel on WhatsApp using this link
What Happens When I Resign or get dismissed?
The retirement pot remains preserved, while the savings pot maintains its accessibility rules. This is a significant improvement over the current system.
What is the minimum amount I can withdraw?
The minimum amount you can withdraw is R2000. You will need to check with your Pension supplier how much money you have in the savings pot to determine whether you will be eligible.
What is the maximum amount I can withdraw?
There is not maximum amount per say, the highest amount that you can withdraw is dependent on the amount that is available in your savings pot.
Does It Affect Existing Retirement Savings?
Only new contributions will be split into the two pots. Your existing retirement savings remain under the current rules.
Making the Most of the Two-Pot System
Based on our experience, here are some strategic approaches:
Emergency Fund First Build a separate emergency fund before considering withdrawals from your savings pot.
Strategic Contributions Consider increasing your total contributions to maintain the same retirement pot value while gaining the flexibility of the savings pot.
Looking Ahead: The Future of Retirement Savings
The Two-Pot System represents a significant shift in South African retirement planning. While it's not perfect (what system is?), it's a thoughtful attempt to balance competing needs in our unique economic environment.
Conclusion: Is This Right for You?
The Two-Pot System isn't just another retirement reform - it's a recognition that life happens, and sometimes we need flexibility without completely compromising our future. While it requires careful consideration and planning, I believe it's a step in the right direction for most South Africans.
Need more specific information? Talk to us via our dedicated WhatsApp line or Consult with your financial advisor you also visit Old Mutual's comprehensive guide for detailed breakdown of how this will work and calculators.
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