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EXPLAINER

‘Two-pot’ retirement system to kick in on 1 March 2024 – here’s how it will work

‘Two-pot’ retirement system to kick in on 1 March 2024 – here’s how it will work

The draft legislation governing the first phase of the proposed two-pot system has been published and is open for comment.

The long-awaited draft legislation with more details regarding the roll-out of the “two-pot” retirement system was published on Friday afternoon.

The changes are being introduced in response to consumers’ dire financial stress during the Covid pandemic, when many were unable to access their retirement savings despite having no other money to turn to. 

The implementation date remains 1 March 2024, and the financial services industry has been working behind the scenes to put things in place. 

Blessing Utete, managing executive of Old Mutual Corporate Consultants, says of the 650,000 members on its retirement fund book, he expects that about 350,000 will be able to access the minimum R2,000 on 1 March next year.

The 2023 Draft Revenue Laws Amendment Bill and 2023 Draft Revenue Administration and Pension Laws Amendment Bill together provide the necessary legislative amendments required to implement the first phase of the “two-pot” retirement system. Public comments received over the course of the past year have been taken into account.

The key changes introduced now include:

  • Seed capital: retirement fund members will be able to access “seed capital” or a portion of their available balance on 1 March 2024. The seed capital will be a minimum of R2,000 or 10% of your savings in the “vested component” as at 29 February 2024, capped at R25,000. Any money withdrawn as seed capital on 1 March 2024 will be subject to the member’s income tax rate. So, income earners in the highest tax bracket will be taxed at 45%.
  • Defined benefit funds will calculate the one-third contributions to the “savings component” based on one-third of the member’s pensionable service increase, and two-thirds contributions to the “retirement component” based on two-thirds of the member’s pensionable service increase with effect from 1 March 2024.
  • Legacy retirement annuity funds will be exempt from the “two-pot” retirement system, as their inclusion would require a complete redesign of these already-complex retirement annuity fund policies. These are typically those retirement funds where members had to pay massive upfront commissions to financial advisers and were then tied into the policies with the threat of high “withdrawal penalties”. Utete advises that those with older retirement annuity policies check with their insurer or fund administrator to find out if their policy is included in the new two-pot system.
  • Housing loans and guarantees: If an employer has granted a housing loan or guarantee to the employee, then the employee has to get the employer’s permission before exercising their right to withdraw money from their retirement savings. There must be sufficient value remaining in their retirement savings to meet the housing loan or guarantee provided.

From 1 March 2024, one-third of any contributions you make towards your retirement savings will go into a “savings pot” and you will be able to withdraw from this pot preretirement. The remaining two-thirds will go into your “retirement pot” to be accessed on retirement and not before. If you die, the money in your “savings pot” can be paid out to a nominated beneficiary or dependant as a lump sum amount.

Complementary measures

Legislative amendments dealing with withdrawals from the retirement component if you are retrenched and have no alternative source of income will be dealt with in the next phase of the two-pot system.

“Further complementary measures may also be considered … to ensure that the primary objectives for saving for retirement (are) not compromised, and to protect the liquidity of such funds at all stages. Members of funds should be encouraged to only exercise the withdrawal option as a last resort, and to try and preserve their savings for retirement for when they retire,” National Treasury said. The draft legislation is strangely silent on the topic of any administration fees or withdrawal costs that administrators are likely to levy when members choose to access the “savings pot” in their retirement funds. DM

Industry and members of the public can forward written comments on the proposed legislation by emailing: [email protected] or [email protected] by close of business on 15 July 2023.

Gallery

Comments - Please in order to comment.

  • Louis Eksteen says:

    This change will become the poster boy for the “Law of Unintended Consequences”…

    As the ANC has already started pushing to have pension funds invest in prescribed markets (in other words forcing pension funds funding SOE’s to allow more looting), we will see mass resignations on the 28th of Feb 2024, to allow people to withdraw their pension funds.
    Similar to a lot of people with government pensions resigning, or divorcing to withdraw their accumulated pension funds a year or 2 ago…

    And this effectively locks people who want to immigrate financially, into a long term commitment with South Africa.

    For R25 000 that becomes easily available, you run the risk of losing millions to prescribed investments…

    Perhaps I am just too cynical…

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