Understanding the two-pot retirement system

The two-pot system gives South Africans access to some of their retirement savings in the case of emergencies. File photo.

The two-pot system gives South Africans access to some of their retirement savings in the case of emergencies. File photo.

Published Jun 18, 2024


By: Ester Ochse and Samukelo Zwane

South Africa’s new two-pot retirement system was signed into law by President Cyril Ramaphosa on June 1, 2024. A statement by the Presidency said the Revenue Laws Amendment Bill of 2023, which established a two-pot system, gave members access to retirement savings without having to resign or cash out their entire pension funds. It also confirmed the September 1, 2024, as the date it comes into effect.

The intention of the new retirement regime is to address the concerns related to lack of preservation before retirement and lack of access to retirement funds by households in financial distress.

The much-talked-about two-pot retirement system will have a significant impact on your retirement investments. The two-pot system gives South Africans access to some of their retirement savings in the case of emergencies while ensuring that they save most of their money in their pension or retirement fund.

The Covid-19 pandemic highlighted the need for people to access a portion of their savings or investments because of the impact of job and income losses. Consider this scenario: you lose your job and, as a result, you and your family are going to lose your home because you cannot afford to pay your rent or bond. The money in your savings pot could save your family from becoming homeless and buy you time to find another job.

The two-pot system’s implementation is a big improvement on South Africa’s retirement regulations and will aid in striking a healthy balance between access to retirement savings and preservation.

Currently, most members of retirement funds choose to access and spend part or all their funds rather than preserve their retirement savings when they change jobs. This has been a major contributing factor to people not being able to retire comfortably when the time comes.

Key questions that will help South Africans know more and better understand the new two-pot retirement system:

What is the two-pot system?

The two-pot system is basically a divided retirement savings into three pots: vested, retirement and savings. From the September 1, 2024, your retirement savings will be treated in the following manner:

Everything you have saved will be classified as vested and will sit in a vested pot. The scheme rules will continue to apply to the vested pot.

Two-thirds of all future contributions will go into your retirement pot and cannot be accessed until the day you retire.

A third of future contributions will go into your savings pot which you can access in an emergency, but only once every tax year (March 1 to February 28 or 29).

The above is subject to exemptions and applicable tax rules.

What happens on September 1, 2024?

Ten percent of your retirement fund will be transferred to the savings pot, with a maximum cap of R30 000. For future contributions, a third goes to savings and two-thirds to retirement. For example, if you contribute R1 200 a month to retirement, from September, 1, R800 will go into your retirement pot and R400 into your savings pot.

When can I use the money in my savings pot?

Access to the savings pot is permitted once a tax year (March 1 to end February), with a minimum withdrawal of R2 000, taxed in line with your marginal tax rate which will be determined by Sars.

What happens if I resign or lose my job?

Funds in the savings pot can be accessed again in the same tax year if you resign or are retrenched and cease to be a member of the fund as a result. Remember, that any money in your vested pot is subject to the old rules. You cannot touch your retirement pot until retirement.

What happens to my savings pot at retirement?

At retirement, you can decide to take some or all the money in your savings pot as a single lump sum payment subject to applicable tax or choose to use the funds to purchase an annuity as with the retirement pot

How will the withdrawal affect my future?

Saving for retirement is important and when you take money out of your retirement savings, it can slow down the growth. It might feel like a small amount of money that you are withdrawing now, but it could make a big difference to the amount in your retirement fund at your retirement date. It will also limit your available lump sum value at retirement. Thus, it’s best to take money out only if it’s an emergency and you have no other options.

Why are people who were provident fund members and over 55 on March 1, 2021, exempt from the new rules?

There are complicated rules applicable to members which can exempt them from participating in the two-pot system. One of the main factors considers the fact that the members are close to retirement and, the introduction of the new rules might negatively impact their retirement planning, as well as ensuring that their old provident fund benefits remain protected.

As a leading provider of integrated financial and lifestyle services, we strongly advice South Africans to consult with a financial adviser so they can make a well-informed decision on whether it would be appropriate to withdraw their savings pot. We also want to emphasise that the accessed retirement funds should not be used for instant gratification pleasures such as going for a holiday or buying a luxury item.

* Ochse is the product head at FNB Integrated Advice and Zwane is the head of product at FNB Wealth and Investments.