LEGAL NOTE: SEPTEMBER 2024 – Impact of Accessing your Savings Component in the Two Pot Retirement System

The Two Pot Retirement System will be implemented with effect of 1 September 2024.

10% of the member’s Vested Component (member’s current fund value) to the maximum of R30,000 will be transferred to the Savings Component, to allow members to have starting capital in the Savings Component as of 1 September 2024. This 10% subject to a maximum of R30, 000 is known as Seeding Capital. The transfer of the Seeding Capital applies to all retirement fund contracts and policies, including pension, provident, retirement annuity and preservation funds. The transfer of Seeding Capital is a once off transfer – 1 September 2024.  

Thereafter, only new contributions will be allocated to the member’s Savings Component. With the implementation of the Two Pot Retirement System, members of retirement funds, will have access to their Savings Component (1/3 of their new contributions) from 1 September 2024. These contributions from the Savings Component can be accessed/withdrawn once in every tax year. A tax year runs from 1 March to 28 February of each year. The minimum amount that the member can withdraw is R2000. Should a member have less than R2000 in their Savings Component, they will have to wait until the next or future tax years to make a withdrawal.

Members do not require any authority/permission from their employers to withdraw monies from their Savings Component, but members should take note of the impact the withdrawal would make on their retirement income. The member is encouraged to only access the Savings Component in cases of financial distress/emergency, and this could differ from member to member. It is the member’s responsibility to decide what a financial emergency is.

Most members are excited about accessing the Savings Component and are asking how much I can access. The withdrawal amount depletes the end benefit at retirement date, so the one-third benefit that a member can take as cash at retirement is grossly reduced (cash amount withdrawn plus compound interest).  The power of compound interest means that the longer the member invests and the more money the member invests, the money grows quicker.

The question to address is, how do members replenish their savings that was withdrawn. The member can, with the assistance of a financial planner, calculate the amount, (including interest and tax paid), that the member has to contribute to their fund to make up the loss. This is how the member can achieve this result by making additional voluntary contributions (AVC’s) to their retirement fund, if the rules permit. One-third of the AVC will be paid into the Savings Component, in addition to the member’s one-third of the new contributions. In this way, the member is able to make up some of the loss caused by the withdrawal amount.

On retirement, the member is able to take up to one-third of their benefit on cash – the one-third in this case, means the Savings Component. Whatever is left in the Savings Component at retirement date, is the one-third cash amount at retirement. The more the member withdraws from the Savings Component during their lifetime during the tax years, the less money will be available at retirement date to take in cash. The retirement tax tables apply to the member’s cash portion at retirement, where the first R550,000 is tax-free.

If the member does not need the money, the member does not have to withdraw/access the Savings Component. The money will keep growing with compound interest until retirement date. Members can also delay accessing the Savings Component in different tax years – in other words, accessing the Savings Component in alternate tax years, preferably only when faced with a financial emergency. The ideal situation will be if members do not access the Savings Component at all.

The member should be aware of the following deductions that will be made from the benefit from the Savings Component:

• Tax at marginal rates – SARS will calculate how much is to be deducted according to the income bracket you fall in.

• If the member owes SARS money (IT88 directive applies), SARS will deduct this amount owing from the benefit that is paid.

• If the member is in the process of paying a settlement agreement made with SARS on an outstanding debt; the tax at marginal rates will be deducted.

• Transaction fees – the administrator will deduct an administration fee for processing your withdrawal/access claim.

  
  

Members are encouraged to have a separate savings account for financial emergencies, where tax is not deducted, and leave their Savings Component to grow with compound interest until retirement date. The Savings Component is meant for having cash available at retirement and should be a last resort to access if in a financial crisis.

For most members the biggest amount saved during their lifetime until retirement is their forced savings in their retirement funds, and this should be protected at all costs. Members are cautioned to consider carefully the need to access their Savings Component, and the impact thereof. Continuous member education, awareness, and financial advice is required to ensure members reach a sustainable retirement outcome.