Preparing and saving for retirement is an important part of financial planning. However, considering difficult economic conditions and people living for longer due to medical advancements, this has become more and more difficult for people to do. In order to encourage a nation of savers, the South African government is introducing the two-component retirement system from 01 September 2024 – otherwise known as the “two pot system”.

This is an attempt to combat the shocking reality that people are simply not saving enough for retirement – only 6% of South Africans can retire comfortably, according to the National Treasury. However, it’s worth noting that the average South African household actually requires over R7 million to comfortably retire.

Even for those whose companies offer retirement plans, there has been a concerning trend of people cashing out their pension funds when they leave that specific job – whether through resignation, retirement or retrenchment. The current system allows individuals to withdraw all their compulsory pension savings when they leave a job. This often means that the temptation to withdraw all the savings when changing employment is too much. But this is affecting people’s retirement savings in the long run. 

Background:

In South Africa, the law was just changed regarding retirement funds to help people retire more comfortably. Government wants us to be a nation of savers, but they understand that emergencies happen.

The two-pot system gives retirement fund members access to a part of their retirement fund benefits in case of emergencies or financial hardship. In other words, it allows you to access some of your retirement savings without leaving your current employer.

This new two-pot legislation introduces two new components: a savings component into which one-third of all future contributions must flow and which will provide yearly access to a member’s retirement fund benefit before their retirement, and a retirement component, which will house two-thirds of a member’s future contributions and will not be available to access until retirement.

Image source: Momentum 

How does it work?

Marking the start of the next chapter in the journey of retirement reform, from 1 September 2024 your retirement contributions will be split into two components:

• One third to your savings component
  • You can withdraw this money when you retire.
  • You can withdraw, for emergencies, a minimum of R2 000 (before fees and taxes) once a tax year without leaving your employer.
• and two thirds to your retirement component.
  • You can’t withdraw any money when you leave your employer.
  • This money must remain invested until your retirement.
  • You must buy a pension when you retire.

However, it is important to always think carefully before withdrawing funds from your savings component, as this can have a negative impact on your retirement savings. (see below table)

What about my existing retirement funds?

On 31 August 2024 your fund will do a once-off compulsory transfer of 10% of your retirement savings or R30 000, whichever is the lowest, to the savings component. The rest of the money will remain in your vested component.

The money in your vested component will still follow the same rules. When you leave your employer you can:

• stay as a paid-up member of the Fund. 
• take your money in cash.
• transfer the money to another fund.

Examples: 

Example 1: from 01 September

The below case study illustrates how this might impact you: If you hypothetically have R150 000 in your retirement savings on 31 August 2024 and your monthly net retirement contribution is R900, then the new two-pot system will affect you as follows –  

Example 2: Vested pot

Here is another case study to show how this might practically work:  If you hypothetically have R150 000 in your retirement savings on 31 August 2024 and your monthly net retirement contribution is R900.

• R15 000 (10% of R150 000) will be transferred to your savings component.
• The remaining retirement savings in your vested component will be R135 000.
• No further contributions will go to your vested component.

What are the taxes and fees applicable?

When it comes to how much tax you will pay, you will be charged on any amount you withdraw from your savings component. This will be taxed at your marginal tax rate, so depending on your taxable income band. (Marginal tax rates apply to the various levels of income in South Africa, with the lowest income earners paying no tax – visit the SARS website for more info on this). 

And what about the withdrawal fee? You will pay a flat fee for each withdrawal from your savings component, irrespective of the amount you withdraw. If you successfully submit your withdrawal through your insurance company, broker, or through your employer, the rate should be between R250-R350 per withdrawal (including VAT), depending if it is done digitally or with a paper-based form. 

Conclusion

Whatever your opinion of this new system, it is coming into law and so it’s important to stay up-to-date on what this might mean to you and how it might impact you. Of course, it is your decision whether you want to access your savings pot and when.

While there are a number of long-term benefits to this new retirement system, which will enhance your financial well-being and provide more flexibility, the implementation of the Two-Component Retirement System will require thorough preparation from the retirement industry. It’s always best to check with your insurer about the specifics of how your retirement funds will be affected.

For more information and to make sure you’re planning adequately for your financial future, contact us at TVC Wealth and Health Managers today!