The Two-Pot Retirement System is a proposed change to South Africa’s retirement savings framework aimed at enhancing financial security and promoting long-term savings for retirement. Under this system, your retirement contributions will be split into two separate pots: a “Savings Pot,” which represents the portion of your lump sum at retirement, receiving one-third of your contributions, and a “Retirement Pot,” which will receive the remaining two-thirds to fund your income during retirement. Members will have the option to access the Savings Pot before retirement if needed, while the Retirement Pot will remain preserved until the retirement date.

The effective date for the new system is 1 September 2024. Your current retirement savings will not be affected and will continue to be governed by the existing rules until that date.

National Treasury proposed the Two-Pot Retirement System to address the financial challenges faced by many South Africans due to a lack of emergency funds. This system allows a portion of retirement savings to be accessed during genuine emergencies while ensuring that the majority of savings remain preserved until retirement.

National Treasury estimates that fewer than 6% of South Africans retire comfortably, largely because many people cash out their pensions when changing jobs. The new legislation will eliminate the option to access retirement funds when switching employers.

These new rules will only apply to contributions made after 1 September 2024. All retirement savings accumulated as of the effective date will be ring-fenced as the “Vested Pot,” with existing rules continuing to apply to these funds.

Starting from 1 September 2024, your retirement fund contributions will be split into two pots: a Savings Pot and a Retirement Pot. One-third of your contributions will go into the Savings Pot, which you can access once per tax year if needed. The remaining two-thirds will be allocated to the Retirement Pot, which will remain untouchable until you retire.

Retirement fund members can apply directly to their pension fund administrators to withdraw funds from their Savings Pot.

The Savings Pot in the Two-Pot Retirement System is designed to provide flexibility by allowing access to a portion of your retirement savings before retirement for emergencies. Here’s how it works and the key rules:

How the Savings Pot Works:

• Allocation: One-third of your retirement contributions will be directed into the Savings Pot. This portion is set aside to be accessible during your working years, providing a buffer for unforeseen financial needs.

• Accessibility: You can access the Savings Pot once per tax year if necessary. This can help with financial emergencies or other urgent needs, providing a safety net without tapping into your primary retirement savings.

Rules Governing the Savings Pot:

1. Withdrawal Limits: You are allowed to make one withdrawal from the Savings Pot per tax year. This restriction is intended to limit frequent withdrawals and encourage responsible use of the funds.

2. Tax Implications: Withdrawals from the Savings Pot will be subject to tax. The specific tax rates and thresholds will apply based on the prevailing tax laws, which may impact the net amount you receive.

3. Preservation of Savings: The system is designed to encourage the preservation of most of your retirement savings. While the Savings Pot offers some liquidity, the remaining two-thirds of your contributions will go into the Retirement Pot, which is locked in until retirement.

4. Application Process: To access funds from your Savings Pot, you must apply directly to your pension fund administrator. The application process will involve verification of your eligibility and compliance with the system’s rules.

5. Unused Funds: Any funds not withdrawn from the Savings Pot will continue to grow with your investments, helping to enhance your overall retirement savings.

This structure aims to strike a balance between providing immediate access to funds for emergencies while safeguarding the bulk of your retirement savings for your future.

Tax Tables for Savings Pot Retirement Cash Withdrawals:

The tax on withdrawals from the Savings Pot will generally follow the standard tax tables for pre-retirement withdrawals, which are as follows (based on the most recent structure):

• R0 – R25,000: No tax
• R25,001 – R660,000: 18% of the amount exceeding R25,000
• R660,001 – R990,000: R114,300 + 27% of the amount exceeding R660,000
• Above R990,000: R203,400 + 36% of the amount exceeding R990,000

These tables are designed to tax withdrawals at progressive rates, with lower amounts taxed at lower rates and higher amounts at higher rates. The idea is to discourage large pre-retirement withdrawals, thereby preserving more funds for your retirement.

It’s important to consult with a financial adviser or tax professional to understand how these withdrawals will impact your overall tax situation.

Regulation 28 portfolios are designed to balance growth with risk management, and they typically include a diverse range of asset classes to ensure adequate liquidity and long-term performance. However, the ability of these portfolios to manage withdrawals from the Savings Pot depends on several factors:

Factors Affecting Liquidity:

1. Portfolio Composition: Regulation 28 portfolios often include a mix of equities, bonds, property, and cash. The liquidity of these portfolios will depend on the proportion allocated to cash and near-cash assets, which are more readily available for withdrawals.

2. Market Conditions: The overall market environment can impact the liquidity of investments. During times of market stress, even traditionally liquid assets may become less accessible or may require selling at unfavorable prices.

3. Fund Management: The liquidity management strategy of the fund manager plays a crucial role. Fund managers typically maintain a portion of the portfolio in liquid assets to meet anticipated withdrawals and other cash flow needs.

4. Withdrawal Patterns: The volume and frequency of withdrawals can influence liquidity. If withdrawals are predictable and within reasonable limits, funds can manage these more effectively. However, if there are large or unexpected withdrawals, it may strain liquidity.

Managing Withdrawals:

• Cash Reserves: Funds often hold a portion of assets in cash or cash equivalents to manage short-term liquidity needs.
• Liquidity Buffers: Fund managers may adjust the portfolio to ensure sufficient liquidity, especially as more participants begin accessing their Savings Pot.
• Regulatory Requirements: Regulation 28 mandates certain liquidity and diversification standards, which help ensure that portfolios are not overly exposed to illiquid assets.

Overall, while Regulation 28 portfolios are generally structured to manage withdrawals, the effectiveness of this will depend on the portfolio’s specific asset allocation and current market conditions. It is advisable for investors to consult with their fund administrators to understand how their specific portfolios are positioned to handle withdrawals from the Savings Pot.