Imagine having some of your retirement money available when life throws you a curveball! Well, that’s what the new two-pot retirement system is all about. Let’s break it down.
What is the Two-Pot Retirement System?
To understand the two-pot system you should think of your retirement savings as a big pot of money. With the new system, this pot is being split into two smaller pots – one for emergencies, and the other is for when you retire.
Emergency Pot: This is like a rainy-day fund for adults. You can dip into it when unexpected costs arise.
Retirement Pot: This is the money you’ll use when you stop working. It’s there to make sure you have a comfortable retirement.
When does the Two-Pot Retirement System start?
The new system kicks in on 1 September 2024. Any money you save for retirement after that date will be divided between the two pots.
Why is Government introducing this System?
Government wants to help you manage your money better. They know life happens, and sometimes you need cash fast. This system gives you that flexibility without putting your whole retirement at risk.
How does the Two-Pot System work?
Pre-September 2024 Savings: Any retirement savings you have accumulated up until 31 August 2024 will go into a vested component.
Post-September 2024 Contributions: Starting 1 September 2024, one-third of your contributions will go into the savings component, and two-thirds will go into the retirement component.
One-Time Transfer: On 31 August 2024, there will be a compulsory transfer of 10% of your retirement savings (up to R30,000) into the savings component.
Can I Withdraw my whole Pension Pot?
Unfortunately, you can’t withdraw your entire pension pot at once. Here’s how it works:
Retirement Component: When you retire, you can only withdraw one-third of this component. The rest will be given to you as fixed monthly payments.
Vested Component: This remains under existing rules, so you can’t access it before retirement or resignation. Any withdrawals will be taxed as normal income.
Savings Component: Accessible any time before retirement, but is subject to tax.
If the combined total of your vested and retirement components is less than R165 000 at retirement, you can withdraw the full amount.
What is the Two-Pot Retirement System withdrawal limit?
You can make a minimum withdrawal of R2 000 from your savings pot, with no maximum limit. However, you can only make one withdrawal per tax year, and it will be taxed based on your income tax rate.
What happens if I do not withdraw from my Savings Pot?
If you decide not to use your savings pot, the money will be taxed as a lump sum benefit upon retirement. The tax rates for lump sums are generally lower than those for pre-retirement withdrawals.
Is anyone excluded from the Two-Pot Retirement System?
The system applies to all retirement funds except legacy annuity policies or inactive funds. Pensioners and provident fund members who were 55 years or older on 1 March 2021 are not included by default but can choose to participate if they wish.
Conclusion
The two-pot retirement system is designed to give you more flexibility with your retirement savings, ensuring you have funds available for emergencies while protecting your long-term financial security. Keep these details in mind as you plan for your future!
FAQs
What happens to legacy retirement annuity fund policies?
Legacy retirement annuity fund policies that meet specific criteria outlined in the draft legislation will be exempt from the two-pot retirement system.
Consult with your financial advisor to understand how the two-pot system will impact your specific retirement plan. Working together, you can create a strategy to achieve your retirement goals.
If I am retrenched, what savings will I have access to?
The savings accessible to you in the event of retrenchment depend on your retirement fund type:
Pension funds and provident funds: You may access both your vested component and the accumulated savings within your savings component.
Retirement annuities: You can only access the savings within your savings component.
How will tax on a withdrawal from the savings component work?
Any withdrawals made from your savings component will be added to your annual taxable income. The tax you will pay on this withdrawal is determined by the applicable marginal tax rate at the time of withdrawal.
