NATASHA HUGGETT-HENCHIE | Understanding the three Rs of the two-pot system

The two-pot system will be officially implemented on September 1. It’s possible you’re feeling a bit bewildered by how it will affect you.

Let’s look at the three Rs of the two-pot system: resignation, retrenchment and retirement — three times when you’ll have to understand how the retirement pot works.

Resignation

If you resign from your job before September 14, the current legislation will apply so you will be able to either withdraw your retirement savings as cash or transfer them into a preservation fund or another retirement vehicle.

If you resign after September 1, there will be different rules for the different pots:

• You will be allowed to take the money in your savings pot in cash as a withdrawal, less fees and taxes, or you can keep it as “paid up” in the same fund, or you can transfer it to your retirement pot, or to the savings pot in your new employer’s retirement fund, preservation fund or retirement annuity fund. Your savings pot will hold one-third of your contributions plus investment growth after September 1.

• You will be allowed to keep the money in your retirement pot as “paid up” in the same fund or transfer it to the retirement pot in your in your employer’s fund, or to a preservation fund, or a retirement annuity fund. The money in your retirement pot must stay in your retirement pot until retirement age. Your retirement pot will hold two-thirds of your contributions plus investment growth after September 1. 

• You will be allowed to take the money in your vested pot in cash, less fees and taxes, or you can keep it as “paid up” in the same fund, or you can transfer it to your retirement pot, or to preservation fund, or to a retirement annuity fund, or to the vested pot with your new employer’s retirement fund. Your vested pot is the total retirement savings you have on August 31. This money will be protected, and the two-pot rules will not apply to it. Investment growth will, however, continue to be allocated to your vested pot after September 1.

Retrenchment

If you are fired or retrenched, the same rules will apply as for resignation, depending on whether you leave before or after implementation of the system.

Retirement

When you retire, your retirement savings will be in different pots, and there are different rules for each one.

If you are a pension fund member, you will be able to take one-third of the money in your vested pot in cash, taxed according to the retirement lump sum tax table, and you will need to buy a pension product with the rest of the money (the compulsory annuitisation benefit).

If you are a provident fund member, the vested money (the contributions plus investment growth before March 1 2021) can be taken out in cash, while two-thirds of the non-vested money (the contributions plus investment growth after March 1 2021, also called the compulsory annuitisation benefit) must be used to buy a pension product.

When it comes to the savings pot, the full amount available in your savings pot can be taken in cash when you retire but will be subject to tax according to the South African Revenue Service (Sars) retirement lump sum tax table. You could also transfer this money to your retirement pot to use it to buy a pension product or buy a pension directly from the savings pot (if you wish to do so).

Finally, when you retire, you must take out a pension-related product with the full amount available in your retirement pot. You cannot take the money in cash, so this is also a compulsory annuitisation benefit. Only if the combined value of all your different compulsory annuitisation benefits is less than R165,000, those amounts can be taken as cash, and taxed according to the Sars retirement lump sum tax table.

• Huggett-Henchie is principal consultant at financial advisory firm NMG Benefits