The primary purpose of a retirement fund is to provide a stable source of income during retirement. However, many people withdraw their savings prematurely, jeopardizing their future financial security. Estimates indicate that approximately R78 billion is withdrawn from the retirement system annually.
Frequent withdrawals of retirement savings during job changes mean that only about 10 percent of fund members maintain their current lifestyle after retirement. The Two-Pot Retirement System, designed to address this issue, will take effect on September 1 of this year.
Under this system, future contributions to retirement funds will consist of three components: savings, retirement, and vested (including existing retirement savings). Although it is called the “two-pot” system, there are actually three “pots.”
The vested component includes savings accumulated in the fund before September 1, 2024, while one-third and two-thirds of all new contributions will be allocated to the savings and retirement components, respectively. Initially, members will be allowed to transfer 10 percent—up to a maximum of R30,000—from the existing fund (vested component) to the savings component.
The two-thirds allocated to the retirement component will only be available at retirement or from the age of 55. Members will be required to purchase a living annuity or life annuity that provides them with a monthly income. Members of provident funds who were 55 years or older on March 1, 2021, and remain members of the same fund, will continue under the old system. They do, however, have the option to switch to the new system before September 1, 2025.
How do annual cash withdrawals work?
Funds stored in the savings component can be withdrawn once per tax year—provided the withdrawal is between a minimum of R2,000 and a maximum of R25,000. These withdrawals will be taxed at the member’s marginal tax rate.
What happens upon resignation?
Members can still withdraw the full amount in cash from the vested component upon resignation, under the same rules as before, and this will be taxed according to the withdrawal tax table. The full amount can also be withdrawn from the savings component, but it will be taxed at the individual’s marginal tax rate. The retirement component must be preserved for retirement, and the member will have no access to these funds. In the case of a retirement annuity, the funds will only be available from age 55.
What happens at retirement?
Members are limited to withdrawing one-third in cash from the vested component and can withdraw the full amount from the savings component. Both will be taxed according to the retirement tax table. The two-thirds from the vested and retirement components must be used to purchase an annuity. The income received from this will be taxed at the individual’s marginal tax rate. This includes the retirement annuity.
Provident funds are more complex, and there is an additional component to consider at retirement, as you will be able to withdraw the full amount of that component in cash.
The new system offers a structured approach to retirement savings, aiming to ensure financial security while still allowing access to funds for emergencies.
Except in absolute emergencies, do not withdraw the retirement money you’ve worked hard to save, prematurely. This is a recipe for regret and hardship later on.