South Africa Introduces Two-Pot Retirement System to Enhance Flexibility and Financial Security

Written on 05/08/2024
MJ Minter Inc

In April Treasury held a ZOOM conference around the proposed two pot retirement system. We have summarised some of the key issues raised.

In a bid to improve retirement outcomes and provide financial relief to individuals in times of distress, South Africa is set to implement a new retirement system known as the "Two-Pot" system.  This reform, which will come into effect on 1 September 2024, allows retirement fund members to make partial withdrawals from their retirement funds before retirement while preserving a portion that can only be accessed at retirement. 

Under the Two-Pot system, retirement contributions will be split into a "savings component" and a "retirement component."  One-third of the total contributions will go into the savings component, while two-thirds will be allocated to the retirement component.  This division aims to strike a balance between long-term retirement savings and providing flexibility to members facing financial difficulties. 

The savings component will be accessible at any time, with a minimum withdrawal amount of R2,000.  However, members are advised to use this component sparingly and only when there is a dire need.  Withdrawals from the savings component will be taxed at the individual's marginal tax rate, but there is no maximum withdrawal limit. 

On the other hand, the retirement component cannot be accessed until retirement, ensuring that a portion of the savings is preserved for the future.  This component will be protected and will continue to grow through investment growth credited to the account. 

To kickstart the Two-Pot system, a seeding capital known as the "seed capital" will be allocated to the savings component.  From the value of the fund on 31st August 2024, 10% or R30,000, whichever is lower, will be transferred as seeding capital.  This one-time transfer aims to provide an initial boost to the savings component and will not be repeated in subsequent years.

It is important to note that the Two-Pot system applies to all retirement funds, including both private sector and public sector funds, except for certain exceptions such as old generation retirement annuity policies and funds with no active participating members.  Additionally, pensioners and members of provident funds who were 55 years and older on 1 March 2021 and have not opted to be part of the Two-Pot system will be excluded. 

In light of these changes, individuals are encouraged to carefully consider their options and seek advice from accredited financial advisors.  It is crucial to identify long-term savings goals and plan for the future, while also being mindful of unforeseen events that may require adjustments to the plan.  For provident fund members over the age of 55 on 1 March 2021, the option to structure contributions according to the Two-Pot design is available. 

We will keep you posted on developments in this regard.