The Two-Pot Retirement System

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The Two-Pot Retirement System

The South African retirement landscape underwent a significant shift with the introduction of the Two-Pot Retirement System which came into effect on 1 September 2024. This new system aims to provide you with more flexibility in managing your retirement savings while ensuring a secure future. It divides your retirement savings into three distinct parts: the Savings Pot, the Retirement Pot, and the Vested Pot, each with specific rules for contributions and access.

What is the Two-Pot Retirement System?

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Why the Two-Pot System?

The system was introduced to provide a balance between accessibility and the preservation of retirement savings. It aims to reduce premature withdrawals and the associated penalties, ensuring that individuals have funds available for emergencies while preserving the majority of their savings for retirement.

Saving Pot

Savings Pot

This provides liquidity for unexpected expenses or financial needs. One-third of all your retirement savings will go into this pot, giving you immediate access to funds subject to certain conditions, once a tax-year, and taxed at your marginal tax rate. It serves as a safety net for financial emergencies, ideal for handling unforeseen financial demands while maintaining overall retirement goals.

Retirement Pot

Retirement Pot

The Retirement Pot, on the other hand, ensures long-term financial security. Funds in this pot can only be accessed upon retirement, safeguarding your future. Two-thirds of all retirement savings will be allocated here, allowing for the steady growth of funds over time. This protects against premature depletion and ensures a reliable income stream in retirement. The Retirement Pot is crucial for maintaining financial stability in your retirement years, ensuring you have a consistent income.

Vested Pot

Vested Pot

The Vested Pot holds all accumulated savings before the introduction of the Two-Pot System. Access to this pot follows current retirement legislation and access rules. It preserves existing retirement savings and maintains continuity with current rules until retirement. This ensures that your pre-existing savings are secure and subject to familiar regulations, providing peace of mind during the transition.

Benefits

Flexibility

Access a portion of your retirement savings before retirement. This provides you with financial agility to manage life's unexpected events without compromising your long-term security.

Security

Protect the majority of your savings for retirement. Ensuring that your core retirement funds remain untouched until retirement helps build a robust financial foundation for your later years.

Growth

Benefit from steady, long-term growth of your retirement funds. The disciplined investment of the Retirement Pot allows your savings to grow, securing your financial future.

Frequently Asked Questions

How will this affect me if I'm already retired?

The Two-Pot System does not apply to those who are already retired. You can continue to access your retirement savings as you currently do.

What are the withdrawal limitations?

You can withdraw from your savings pot once every tax year before retirement (minimum withdrawal of R2000), subject to certain conditions and taxed at your marginal tax rate. Your own tax liability will influence the calculation and EasyEquities will act on the directive from SARS for the total tax amount to withhold as part of your savings pot withdrawal.

What is the tax treatment?

Withdrawals from the Savings Pot:
You will be taxed at your own marginal tax rate. Your own tax liability will affect the calculation, but it is important to note that these withdrawals count as income. Depending on your situation, the withdrawal could push you into a higher tax bracket, potentially resulting in greater-than-expected deductions. Consider discussing this with a registered tax practitioner beforehand to avoid any unexpected surprises.

EasyEquities will act on the directive from SARS for the total tax amount to withhold as part of your savings pot withdrawal. As per the directive we receive from SARS, if you have any outstanding tax obligations, this will first be deducted from your savings pot withdrawal and paid across to SARS on your behalf.

Retirement Pot:
Funds in this pot are locked in until retirement (i.e. you cannot withdraw from this pot until you retire), ensuring long-term financial stability. This pot is taxed according to existing retirement fund rules upon retirement.

What happens when I retire?

Savings Pot:
When you retire, the funds in your Savings Pot will be included in the lump sum retirement benefit calculation. You can access these funds at retirement, and they will be taxed according to the retirement fund benefits lump sum tax tables applicable at the time of retirement.

Retirement Pot:
The funds in your Retirement Pot will be used to provide a regular income during your retirement years. These funds are typically converted into a Living Annuity, which provides a steady stream of income. The exact amount and frequency of the income will depend on the type of annuity you choose and the total amount in your Retirement Pot. These funds are taxed according to the existing retirement fund rules applicable at the time of retirement.

Vested Pot:
When you retire, the funds in your Vested Pot are accessible according to the existing rules that applied before the introduction of the Two-Pot system. You can take up to one-third as a lump sum cash payout, with the remaining two-thirds needing to be annuitised. The tax treatment of these funds will follow the rules that were in place prior to 1 September 2024, ensuring continuity and protection of your pre-existing savings.

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