Crisis to stability: how two-pot system will secure SA’s retirement savings

SA's retirement landscape is set for a significant transformation with the introduction of the two-pot system on September 1. This transformative policy shift aims to reshape how retirement contributions are managed, prioritising both immediate financial needs and long-term preservation.

At its core, the two-pot system is designed to address a fundamental flaw in the current retirement landscape: the rampant depletion of retirement savings during an individual's working years.

The two-pot system will divide retirement contributions into three distinct components: the vested pot, the savings pot and the retirement pot.

The vested pot includes all retirement savings accumulated before the system's implementation, remaining under the current retirement rules. As the adage goes, “Old money, old rules, new money, new rules”.

The savings pot will comprise one-third of new contributions and will be accessible once per tax year for emergencies. The balance at retirement can be taken as a lump sum.

The remaining two-thirds will go into the retirement pot, which will be preserved until retirement. This split ensures that a substantial portion of retirement savings is safeguarded for the future, fostering financial stability. 

The introduction of the two-pot system is not just a policy shift; it is a necessary intervention for the country's economic health. The majority of South Africans struggle to maintain their standard of living post-retirement due to early withdrawals from their retirement savings. The forced preservation of two-thirds of new contributions will significantly enhance retirement outcomes, drastically improving the savings available at retirement compared to the current system. This change is important for reducing the dependency on state support, which strains national resources.

Moreover, the two-pot system encourages disciplined financial behaviour. By limiting access to the savings pot and imposing stringent conditions on withdrawals, individuals are discouraged from making impulsive financial decisions that could jeopardise their future. This approach promotes long-term financial planning and allows retirement funds to benefit from compounding interest, significantly increasing the total savings over time.

The practical implications of the two-pot system are significant. Members will have access to their savings pot once per tax year, provided the withdrawal amount is at least R2,000. Additionally, withdrawals from the savings pot will be taxed at the individual's marginal tax rate, further discouraging unnecessary withdrawals and promoting long-term preservation.

Initially, a one-time transfer of 10% of the existing fund value, capped at R30,000, will be made to the savings pot. With a minimum withdrawal value set at R2,000, individuals with less than R20,000 saved will initially have less than R2,000 in the savings pot and, therefore, will not be able to access these funds immediately. However, as you continue to contribute and your savings pot exceeds R2,000, you will then be able to make withdrawals.

The two-pot system is a strategic move towards ensuring long-term financial security for South Africans. By balancing immediate financial needs with the necessity of preserving retirement savings, it offers a sustainable solution to the challenges faced by many retirees. This system not only benefits individuals, but also contributes to the broader economic stability of the country. As the implementation date approaches, it's important for individuals to consult with financial advisers to fully understand the system's implications and make informed decisions that align with their long-term financial goals.

The two-pot system is a forward-thinking reform that addresses the critical need for preservation of retirement savings in SA. By ensuring that a substantial portion of retirement contributions is preserved until retirement, the system promises to enhance financial security for individuals and reduce the dependency on state support. This balanced approach is essential for fostering a sustainable and prosperous economy, benefiting both current and future generations.

Old Mutual's accredited financial advisers can help you understand the intricacies of the two-pot retirement system so you can make sound decisions about your financial future. Click here to find an Old Mutual financial adviser.

• About the author: Michelle Acton is a Retirement Reform executive at Old Mutual.

This article was sponsored by Old Mutual.