I’m sure you have all at some point over the past 12 to 24 months come across communications regarding the Two-Pot System, which we have also previously included in our own newsletters. The Two-Pot system is likely to come into effect on the 1st of September 2024 after it was originally proposed to take effect on the 1st of March 2024, but all role players were in agreement that this was very unlikely to happen due to needing additional time to put structures and processes in place.
Despite there still being much uncertainty around the Two-Pot System, we do want to ensure we do communicate as much information in this regard to our clients as it does become available.
- What is the Two-Pot System?
In a nutshell, it will mean that an investors contributions into pre-retirement investment vehicles from the 1st of September 2024, will be split into two pots. One third of the contributions will go into the first pot, a retirement savings pot, where these funds can be accessed through one allowable withdrawal per annum before retirement with a minimum withdrawal of R2,000, in accordance with certain limits. The remaining two thirds will go into the second pot, which will be the retirement pot, and 100% of these funds will need to be used to purchase an annuity at retirement in order to pay the investor income.
Investors who have already reached age 55 or older, will not be affected by the Two-Pot System. As they are likely to have a shorter investment horizon before retirement, it is thought that the Two-Pot System would have a minimal effect on the funds which they can access on an annual basis, and therefore they would be excluded from the Two-Pot System and will continue to adhere to current retirement investment regulations. However, should they wish to partake in the Two-Pot System, they may be able to opt in.
- What happens to my current retirement vehicle savings (Vested Pot) which has accumulated before the 1st of September 2024?
All accumulated retirement savings prior to 1st September 2024 will remain as they currently are or can even be considered as remaining in a third pot. These funds will ultimately adhere to the retirement rules as they currently are prior to 1st September 2024, and means that one third of this pot will be accessible as a cash lump sum at retirement, and the remaining two thirds will have to be used to purchase an annuity. Accessibility will also remain as is currently allowed, which is as follows:
- Retirement Annuity – a person can only access these funds from age 55 onwards when retiring where one third will be accessible in cash, and will be taxed at current post-retirement tax tables at a rate of between 18% to 36%, on a ‘step up’ basis according to the value with the 1st R550,000 collectively being free of any tax, and the remaining two thirds will have to be used to purchase an annuity.
- Preservation funds – up to the full value can be accessed as a once off pre-retirement withdrawal as long as no previous withdrawals have been made, and the withdrawn funds will be taxed according to the current pre-retirement tax tables of between 18% to 36% on a ‘step up’ basis according to the value with the 1st R27,500 being free of any tax. At Retirement, the same rules will apply as above for the Retirement Annuity, but please note that any pre-retirement withdrawals made will reduce the tax-free portion allowed at retirement across all withdrawals previously made from retirement products.
- Provident/Pension Funds – if you leave your employment, you will be able to access up to 100% of the provident/pension fund which accumulated up to the 1st of September 2024, but please note that these funds will then be taxed as a pre-retirement withdrawal and tax will be payable as mentioned above for Preservation funds, and if retiring from a provident/pension, the same rules will apply as is listed above for the Retirement Annuity.
When the Two-Pot System does come into effect, a person will however be able to elect to transfer up to 10% of their current retirement savings, up to a maximum of R30,000 into the retirement savings pot which can be accessed as mentioned above.
- How will withdrawals from the Retirement Savings Pot be taxed?
When making pre-retirement withdrawals from the retirement savings pot, these funds will be taxed according to your individual tax rate with SARS. It will therefore be added to your annual income reported to SARS, which will increase a person’s annual tax payable.
- What happens when I retire?
When you retire, whatever investment value is remaining in your retirement savings pot can be accessed as a lump sum, and the full value in your retirement pot must all be used to purchase an annuity.
Any funds you have remaining in a Vested pot from retirement savings accumulated prior to implementation of the Two-Pot System will be accessible as listed in point 2 above.
- What are the risks?
- It is always important to have discretionary funds available to a person when they retire which can be accessed in times of an emergency, but more importantly, they can be used to subsidise annuity income if it no longer become sufficient to cover a person’s monthly income required. If an investor annually draws down funds from the Retirement Savings Pot, they may have very little available to them as discretionary funds when it is time to retire, which can result in insufficient monthly income available to the investor at the time of retiring, or in the future.
- Withdrawing from the Retirement Savings Pot may result in a person paying higher taxes on an annual basis due to an increased annual income arising from annual withdrawals made from the retirement savings pot forming part of your annual income for tax purposes. This may be exacerbated further if it does push a person into a higher tax bracket due to the total annual income.
- In addition to this, because income tax is payable on any pre-retirement withdrawals, this negates any benefit a person may have received due to Retirement contributions being tax deductible.
- As any retirement funds withdrawn no longer have the ability to earn compounding growth, which many consider to be the eighth wonder of the world, this may substantially reduce the funds available to an investor at retirement.
- What are the benefits?
- Unfortunately, we know the unemployment rate in South Africa is very high, and therefore it does provide access to funds if a person doesn’t have any other form of income, although it is likely to still be insufficient to make a meaningful difference to the individual’s standard of living.
- From the 1st of September 2024, Provident Funds, Pension Funds and retirement annuities will all be treated in very much the same way, which means that persons employed will annually be able to access a portion of their provident and/or Pension Fund, but they will no longer be able to access the full value when they leave employment, which may stop people from resigning simply to access funds, and it does help to ensure a portion of people’s retirement funds are protected until retirement age.
Although the information above was considered to be correct at the time of writing this article, all rules and regulations around the Two-Pot System have not yet been completely finalised, and there may be additional rules/regulations at implementation stage, or the workings may differ if any adjustments have been made prior to implementation.
We will be following any progress in the implementation of the Two-Pot System closely and will continue communicate any information received to our clients, but should you have any queries in this regard, please feel free to reach out to your RWM Private Wealth Manager and they will be happy to provide clarity where necessary.
