7 things you should know about the latest two-pot retirement proposals

Laura du Preez | 19 June 2023

Laura du Preez has been writing about personal finance topics for more than 20 years, including eight years as personal finance editor for two leading media houses. 

You are likely to get immediate access to 10% of your existing retirement fund savings up to R25 000 which will be used to “seed” the savings pot of your fund in March next year, new draft legislation released by National Treasury proposes.

The draft legislation on the two-pot retirement savings system proposes that all retirement funds – including retirement annuities (RAs) - set up a savings pot and retirement pot from March 1, 2024.  

From that date, one-third of your contributions will be added to the savings pot which you can access once every tax year, while two-thirds will fund your retirement pot which cannot be touched until retirement.

For what you have saved up until that date – the vested pot – the rules remain the same. For most members, this means access on resignation, retrenchment or dismissal in employer-sponsored funds and access only after age 55 for RA fund members.  

But before you get too many ideas about withdrawing the money, there are a few things you should know:

1.  Access may not be immediate

The draft law proposes that your retirement savings pot will automatically be “seeded” with 10% of your savings on March 1 2024, with a maximum of R25 000 being transferred.

It also proposes that you can only withdraw this money if you have a minimum of R2000 in your savings pot. This means if you have less than R20 000 saved when the two-pot system is introduced, you won’t have enough to withdraw immediately.  

There will be many disappointed members who cannot access the money, Blessing Utete, managing executive of Old Mutual Corporate Consultants, says.

He says only 350 000 out of the 650 000 members in employer-sponsored funds that Old Mutual administers, will have the R2000 to withdraw on March 1 next year.

Across all Old Mutual administered retirement funds, including RAs, a million members are expected to be able to withdraw.

You will need to have at least R250 000 saved to be able to draw the maximum of R25 000.

Remember that what you withdraw from the savings pot reduces what you can take as a lump sum at retirement.

You may need cash at retirement to relocate, for healthcare needs and once-off expenses, for example, a new car, Utete says.

2.  Tax will be deducted


Remember R550 000 is tax-free at retirement

If you don’t take money out of your savings pot, at retirement you can take it and one-third of your vested savings out as cash. Up to R550 000 of that amount will be tax-free as long as you have not used this tax-free amount previously on retirement or retrenchment lump sums.

The money you withdraw from the savings pot will be added to your taxable income and taxed at your marginal tax rate – as high as 45% for top earners. Read more: How do the income tax brackets work and what is my marginal tax rate?

Your fund’s administrator will pay the tax to the South African Revenue Service (SARS) and you will be paid the after-tax amount, Utete says.

It is not yet clear whether funds will need a tax directive from SARS before you can withdraw. Utete says SARS will provide information about your marginal tax rate but Leanne van Wyk, director at ICTS Legal Services, believes directives will be required for withdrawals or at retirement for all three pots.

3.  Defined benefits split on years of service

If you are a member of a defined benefit fund, your retirement savings will be split between the vested, savings and retirement pots using your years of pensionable service, the draft legislation proposes.

In a defined benefit fund, your years of pensionable service – or the years you work for an employer that count towards your pension – are typically used in a formula to determine your pension.

Stephen Walker, the head of Old Mutual’s actuarial team, says in a typical formula you will get 2% of your final salary for each year you work. This would mean that after 40 years of working, you will get 80% of your final salary as a pension for the rest of your life.

For defined benefit fund members, the vested pot will be based on the formula using your pensionable service years until March 2024. For example, this would be 10 years if you started working in March 2014.

Your retirement pot will be based on the formula using two-thirds of the years of service starting from March 1, 2024, Walker says.

Your savings pot will be calculated with one-third of the years of service from March 1 2024, but if you withdraw money from it, the years of service will reduce in line with what you withdraw and start later than March 2024.

Walker says actuaries are in consultation with National Treasury about problems with the application of the draft legislation to the largest defined benefit fund in the country, the Government Employees Pension Fund (GEPF). The lump sum benefit for GEPF members is just less than one-third, he says.

4.  Older provident fund members can opt-out

The draft legislation proposes that members of provident funds over the age of 57 will participate in the two-pot system unless they opt-out.

On March 1, 2021 provident fund members were given tax deductions for contributions, but are obliged to buy a pension or annuity with two-thirds of their savings from that date. Members over the age of 55 on that date were exempt.   

The draft legislation proposes they save two-thirds of their contributions in the retirement pot and use it to buy an annuity at retirement, unless they opt out of the new system, Van Wyk says.

Opting out will deny them immediate access to 10% of their benefits and one-third of future contributions.

Van Wyk says Treasury is likely to be asked to amend the legislation to let provident fund members opt into the two-pot system rather than opt-out.

5.  Older retirement annuity funds will be excluded

Members of older RA funds will not be able to access any of their savings in those RAs as they will be exempt from the two-pot system. These funds have insurance components, bonuses and penalties for withdrawing before the term of the policy making it difficult for them to split savings and allow withdrawals.

These funds must notify the Financial Sector Conduct Authority that they met the criteria and the FSCA can verify this.

6.  You may not be allowed to withdraw

You may not be allowed to withdraw the savings in your savings pot if:

  • You have a home loan backed by a guarantee from your retirement fund. In future, home loans backed by your retirement fund will only be granted for 65% of what you have saved – most funds have already been adhering to this, Utete and Van Wyk says. Read more: Can my retirement fund give me, or help me get, a loan?

  • You owe your employer damages for misconduct such as theft. Van Wyk says she expects employers will have to sign off your claim form. Read more: Could any money be deducted from my retirement savings?

  • If you are getting divorced or your relationship with a life partner is dissolving and your former spouse or life partner does not consent to any withdrawal from the savings pot.

  • You owe maintenance and a court has ordered the money can be recovered from your fund or the fund has been notified that such an order is pending.

 7.  Retirement pot not accessible for three years after emigration

If you emigrate you won’t be able to take money from the retirement pot of your employer-sponsored fund for three years.

Van Wyk says that retirement annuity fund and preservation fund members are currently not able to take their savings out of these funds for three years after they emigrate.

The same rule will apply to savings made into the retirement pot of any employer-sponsored fund under the two-pot system. This is a big change and many emigrants rely on their retirement savings to emigrate, she says.

Think carefully before you withdraw

Remember that whatever you withdraw will reduce your income at retirement. If you don’t absolutely have to, don’t withdraw the money unless you have checked that you have more than enough to fund your pension.

The savings pot is not meant to be a bank account to be used to quickly transfer R5000 to spend on your rent or to go out, Marian Gordon, principal investment consultant at Simeka Consultants and Actuaries, says. Members should not think of it as money for rent or for going out.

Money taken out through the two-pot system could have the effect of more than halving the amount you have at retirement, Gordon shows in an example in Sanlam’s latest Benchmark Survey. Read more: You can improve your retirement income with the right decisions.

If you plan your finances, this is not the money you go after first, Utete says.

This is money you withdraw only in a crisis – if you are about to lose your house or your sick child needs treatment, Walker says.