The South African government made the executive decision to make changes to the retirement savings system by introducing what they have coined the two-pot system. This system, which affects current and future retirement members aims to simultaneously advance the conservation of retirement investments up until individuals retire while allowing a controlled amount of access to the funds while individuals are working.
The announcement of this system has brought about mass confusion, as opposed to the intended relief that the government had hoped for. Luckily for you, this is a simplified crash course explaining exactly what this system is and what its implications are.
“From the date of the implementation of this system, all contributions to provident, pension and retirement annuity funds will be split into two components: One-third of the contributions will be credited to a savings component, which members can access before retirement in the event of an emergency, and the remaining two-thirds will be credited to a retirement component, which will be inaccessible before a member retires, and at retirement must be used to purchase a pension-providing product,” explained investment specialists Allan Gray.
Essentially, the two-pot system will allow individuals to have access to 1/3 of their retirement funds, via a savings component that can be accessed when necessary. The remaining 2/3 will be paid upon retirement or once one turns 55 and will be paid as a retirement annuity, making financial security more convenient.
According to Investec, the implementation of this system will address the common issue where people withdraw the full amount of their pension savings when changing jobs, which leaves nothing for retirement, causing financial distress on a big scale. It is also important to note that withdrawals will only be permitted once per tax year, which is taxable based on your marginal tax rate
When accessing your funds, Nedbank advises individuals to consider the following:
- A minimum of R2,000 can be withdrawn; if you have less than R2,000 in the savings pot, you cannot withdraw.
- You can only withdraw once in a tax year, i.e., between 1 March and 28 February each year.
- There is no maximum withdrawal amount.
- You will be charged an administration fee for the withdrawal, which will be deducted from the amount you want to withdraw.
- You will pay tax on the savings pot withdrawal benefit based on your individual marginal tax rate as supplied by SARS.
- In a pension or provident fund, on resignation, you can only cash out your savings pot if it is less than R2 000 or you have not already accessed your one withdrawal per tax year. Otherwise, you will be required to preserve this benefit in the same way you will preserve your retirement pot benefit.
If you are feeling unsure, consulting with an investment manager is highly advisable, furthermore, companies such as Discovery have come up with innovative ways to help you understand the system better. They have also built a two-pot calculator which assists in calculating the impact of savings pot withdrawals.
