South Africa’s new Two-Pot Retirement system is changing the way fund members can access and preserve savings for their later years. We explore the benefits for you.
Alarmingly, only about 6% of South Africa’s retirement fund members can afford to retire comfortably, according to the National Treasury. This tiny percentage would be microscopically smaller if it referred to the retirement readiness of all working-age South Africans, including those in the informal economy. It’s blindingly obvious that across the board, retirement savings need to be ramped up to ensure that today’s younger generation can live their golden years without financial worries. To encourage better retirement outcomes for employees in the formal economy (who have to pay into a retirement fund), the government has introduced the Two-Pot Retirement System, which came into effect on 1 September 2024.
What’s new?
The goal of the Two-Pot System is to provide more flexibility and financial security – by balancing an individual’s immediate financial needs with the need to save for retirement. So, the big change is that the new system allows members to withdraw parts of their retirement savings while still working. Previously, employees in financial difficulty could only access their retirement savings if they left their employer (by resigning or through dismissal or retrenchment).
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The reason for this change is government’s acknowledgement of South Africa’s financial reality, where 87% of respondents in Sanlam’s 2024 Benchmark Report are feeling financially stressed and 46% of employed respondents struggle to meet basic needs like food and rent. For many South Africans, the retirement fund is their only savings. The Two-Pot System makes it unnecessary to quit your job if you’re desperate to access your retirement savings early.
What’s in the pots?
The Two-Pot System consists of:
• Retirement pot: two-thirds of your retirement contributions will now go into this pot, which will grow over time and can only be accessed at retirement.
• Savings pot: one-third of your retirement contributions will go into this pot. If you’re in dire financial need, you can withdraw money from this pot (once a year) before reaching retirement age. The minimum withdrawal amount is R2 000.
• But there’s also a third pot (the vested component): this contains all your retirement savings up to 31 August 2024. You can transfer this money to your retirement pot (tax free) or leave it in the third pot (to which the old rules apply).
Seeding Capital
At the start of the Two-Pot System, 10% of the value of your existing retirement fund savings (or R30 000, whichever is lower) will be transferred into the savings pot. This is once-off seeding capital.
Withdraw savings (if you must)
Historically, South Africans have withdrawn too much too early from their retirement fund, leaving them without adequate pension income. Old Mutual’s 2023 Savings & Investment Monitor found that 70% of employees who left or changed their jobs took at least some of their retirement savings in cash, with 30% cashing in their entire retirement savings.
Withdrawing all of it is no longer permitted, but you can access your savings pot once a year – in an emergency. “It may be tempting to make a withdrawal as soon as possible, but keep in mind that you will be giving up the amount drawn plus all interest on that amount in retirement,” says the National Treasury.
“Plus, if you wait to withdraw money from the savings component until retirement, it will attract less tax.” It’s important to understand that the amount you withdraw will be added to your taxable income for that year and could push you into a higher tax bracket.
Ultimately, the new system won’t work miracles for older employees who have cashed in their retirement funds. But the Two-Pot System could be a game-changer for younger members who still have the time to grow their retirement fund savings – especially if they can resist early withdrawals and keep both pots cooking.
Example
If you withdraw R50 000 from your savings pot at age 35, you could lose out on up to R870 000 of retirement savings at age 65. That’s how much your investment might have grown had you preserved the R50 000 over 30 years (total investment growth assumed at 10% minus inflation at 6% plus 4%. Source: Allan Gray)
Words by: Silke Colquhoun
Photos: Gallo/Getty Images
