By Vusuthando Percyvil Dube
Effective from September 1, 2024, the Two Pot Retirement System represents a transformative shift in South Africa’s retirement savings paradigm. This system aims to provide a financial safety net during times of crisis while also promoting long-term savings for retirement. This article delves into the depth of this system, including the structure of its components, eligibility criteria, and a detailed example to illustrate its workings.
According to Mark Kingon, South African Revenue Service (SARS) head of Leverage Legal Product, the lack of conservation before retirement, as highlighted by various discussion papers, demonstrated the need for preservation plans, as many people resign to withdraw their retirement funds before reaching retirement age. (SARS TV, 2024)
Contrary to its name, the Two Pot Retirement System consists of three separate containers: the Vested Pot, the Retirement Pot, and the Savings Pot. Each of these buckets is critical to managing retirement savings and accessibility.
Vested Pot
The Vested Pot contains all retirement contributions made up until August 31, 2024. Contributions are set at 10%, which is known as the “boost.” This pot is taxed according to the prevailing tax regulations. No withdrawals can be made from this pot until the retirement age of 60, except for circumstances involving a change of employers or other exceptional cases.
Retirement Pot
Beginning September 1, 2024, retirement savings contributions will be allocated such that two-thirds (2/3) of the contributions will go into this pot. The funds in the Retirement Pot are locked until the account holder reaches retirement age, ensuring that these savings are preserved for future needs.
Savings Pot
One-third (1/3) of the contributions will be directed towards the Savings Pot, along with a potential portion from the Vested Pot. This pot allows for limited withdrawals — one per tax year, with a minimum withdrawal limit of R2,000. Withdrawals are subject to personal income tax and associated transaction fees. Withdrawals are taxed at the marginal income tax rate, and should the withdrawal elevate the individual into a higher tax bracket, they will experience a higher tax rate.
The Two Pot System is available to all individuals contributing to Pension Fund, Provident Fund, Preservation Fund, and Requirement Annuity. Significantly, individuals aged 55 and above can choose the existing retirement arrangements or transition into the new system.
The primary drive behind this reform is to assist individuals facing financial emergencies by granting them access to a portion of their retirement savings without the need to jeopardize their employment status. Additionally, it aims to mitigate the risk of individuals depleting their retirement savings before reaching the age of 60, thereby reducing dependance on government pensions in later life.
Analytical Example: Mr. X’s Scenario
To elucidate how the Two Pot Retirement System operates, we examine the case of Mr. X. For the sake of this example, let us assume he earns monthly salary of R15,000, his annual Income is R180,000 and contributes R2,000 into his retirement (Total annual contribution: R24,000)
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Vested Pot Calculation
- Current Vested Pot Balance: R60,000 (prior to 1 September 2024).
- Boost Calculation: 10% of R60,000 = R6,000
- Final Vested Pot Balance: R60,000 – R6,000 = R54,000
Savings Pot Calculation
Starting from September 1, 2024, contributions will be split:
- Mr. X’s Vested Pot balance is R60,000, hence he can move R6,000 (10%) to the Savings Pot. R30,000 is the maximum limit. 2.To determine his 1/3 payment, Mr. X provides R1000, his company contributes R1000, for a total contribution of R2000. To calculate the entire contribution to the savings account, divide it by 100 and multiply it by 33.33.
Withdrawal Example
If Mr. X opts to withdraw R6,000 from his Savings Pot, his net amount after deductions would be calculated as follows:
- Withdrawal Amount: R6,000
- Income Tax Deduction (18% =R1,080 from his marginal tax bracket).
- Transaction fee: R200 (transaction costs range from R100 to R600 depending on the amount withdrawn).
Thus, the final amount he receives would be:
R6,000 – R1,080 – R200 = R4,720
However, if he has outstanding dues with the South African Revenue Service (SARS) amounting to R2,500, the subsequent amount he would net after settling his debt would be:
R4,720 – R2,500 = R2,220
The Two Pot Retirement System is a progressive concept that aims to improve the financial stability of South African individuals during emergencies while also ensuring long-term retirement savings. Though it increases complexity in terms of contributions and withdrawals, it encourages people to think critically about their financial destiny. Engaging with a financial advisor is strongly recommended for optimal management of these funds, especially when considering early withdrawals from the Savings Pot. Although the system is functioning, individuals can benefit from being knowledgeable with it to make financially sound choices.
For more insights watch; https://www.youtube.com/live/Y4CDHbq-nWU?si=ACLe9KJKzUFizN4y
