The good, the bad and the confusing: understanding the two-pot system

The divisive two-pot system has been signed into law by President Cyril Ramaphosa.

The Pension Funds Amendment Bill’s two-pot system allows members to access their retirement funds more flexibility before early resignation or retirement.

The funds, which can be accessed by members of retirement annuities and pension, retirement and preservation funds, will be accessible from September 1 this year.

While accessing retirement funds earlier seems like an advantage, it comes with caveats that have left many savers confused. We break down some of the trickier parts:.

MAKING THE POTS HAPPEN

The two-pot system will kick in on September 1. This will see your retirement savings split into a savings pot and a retirement pot. According to a recent press statement from the Government Employees Pension Fund (GEPF), the savings pot is built for flexibility, creating a safety net for unforeseen financial needs. This way you do not withdraw from your retirement savings when changing jobs or encountering financial difficulties.  

The main retirement pot, which receives two-thirds of your saved amount, is built to only be accessed on your retirement or death. This pot is strictly built for long-term retirement savings.

ACCRUALS

What happens to your retirement savings before the shift in September? According to the GEPF, 10% of the savings will move into the new savings pot. The seed capital will immediately be accessible to members from September 1 with a once-off, non-taxable transfer.

HOW MUCH YOU CAN TAKE?

According to Allan Gray Retail legal team manager Jaya Leibowitz, the seed capital will be limited to 10% of the amount in your retirement fund account as of August 31.

"For you to have access to a withdrawal benefit of R30,000, the value of your retirement fund account on August 31 2024 needs to be at least R300, 000," she said.

Overall, a minimum of R2,000 can be taken. Withdrawals are limited to once in a tax year, namely between March 1 and February 28 the next year.

Executive for solutions and enablement at Alexforbes, John Anderson, recently published that "different providers have decided on different payment models" that are either fixed (a specific charge amount) or on a sliding scale (adjusted according to your income).

CAUTIOUS SPENDING

While the savings pot is accessible in times of need, not every emergency warrants withdrawing funds from it.

Leibowitz warned: "It is important to remember the intended purpose of your retirement investment is to provide you with an income during retirement."

She said each withdrawal runs the risk of being taxed and could push you into a higher tax bracket, depending on your income and the value of your withdrawal.

"It is critical to understand that members’ ability to withdraw from their savings component hinges on many factors, including the Financial Sector Conduct Authority being able to timeously approve fund rule changes and the South African Revenue Service (Sars) being able to issue tax directives," said Leibowitz.

TWO-POT SUPPORT

While it has divided many opinions, the two-pot system has received some support. 

Cosatu acting national spokesperson and parliamentary coordinator Matthew Parks said in a recent Business Day article: "This will provide invaluable relief to millions of workers and their families who are drowning in debt and battling to cope with the rising cost of living."

Citing that pension laws were inflexible, Parks said it created a disadvantage for those who lost their jobs early. Consequently, he found many of them are "unemployed and with no savings left".

Cosatu is working with National Treasury, Sars, the Financial Sector Conduct Authority, the Association for Savings and Investment SA and pension funds to ensure smooth implementation when the two-pot system kicks in.

TAXING PROBLEM

Speaking to Sowetan, Anderson said it was essential to seek holistic financial advice to better understand the funds. This would assist with understanding that withdrawals are not instant. There are also may requirements before withdrawals.

"It’s important to ensure administrators have covered all the scenarios in ensuring the fund is ready for the new environment," Anderson said.

In a recent report for Pension World South Africa, experts found withdrawals would result in a significantly higher tax amount being paid by members. They urged people to seek financial advice about withdrawals, the debts they accrue along the way, and the high amounts being too much for unemployed South Africans.