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Not planning sufficiently can cause employees financial stress, limit their access to necessary resources, and diminish their quality of life. It can also put employers and their payroll departments under pressure, which is why understanding the new two-pot system and its implications for a company is critical.
The two-pot system, which went into effect on 1 September, is a retirement savings framework that offers individuals greater flexibility and control over their retirement funds. While it may be tempting to withdraw retirement funds for immediate needs, doing so can significantly impact your long-term financial security.
Early withdrawals can jeopardise your retirement savings plan, potentially leaving you vulnerable in your later years.
Practically, what the new system means is that from 1 September any new retirement contributions are split into two pots: a savings pot and a retirement pot. One third of contributions goes into the savings pot and two thirds goes into the retirement pot. Members can now access funds accumulated in the savings pot before retirement, without needing to cease employment. The funds in the retirement pot will be preserved until retirement.
All existing retirement savings are now kept in a vested pot, with any new savings spread between two new pots, a savings pot and the retirement pot. No additional contributions can be made to the vested pot, except for individuals participating in retirement funds who were at least 55 years old on 1 March 2021.
Ten percent of existing savings moves from the vested pot into the savings pot, but only for those with existing retirement savings. A maximum of R30,000 would have been moved to the savings pot.
For example, if you have R200,000 in your vested pot, 10% (or R20,000) would have been moved into the savings pot as a once-off opening balance. The vested pot therefore reduces to R180,000.
The new system permits you to withdraw cash from your savings pot once annually. The minimum withdrawal amount is R2,000. Withdrawals from this component will be included in your gross income, resulting in PAYE tax deductions. A tax directive will be required to calculate the correct PAYE amount to withhold.
Any withdrawals are taxed at your marginal rate and attract a transaction fee. If you owe SARS any money, this will automatically be deducted before you receive funds.
Withdrawing from the savings pot will reduce your retirement savings.
The introduction of the two-pot system underscores the importance of effective retirement fund management. This new system aims to address existing challenges and promote better financial health by providing a structured approach to saving and accessing retirement funds.
Understanding and adapting to these changes is vital for individuals seeking to secure their financial future and ensure they are well-prepared for the transition into retirement.
How does this affect payroll?
There are no required changes to payroll processes due to the recent updates to savings withdrawal benefits and contribution reporting.
In terms of savings withdrawal benefits, withdrawals from the savings component of retirement funds will be included in remuneration. Retirement funds will need to obtain a tax directive from the South African Revenue Service to determine the correct PAYE withholding. The retirement fund is also required to report relevant withdrawals using IRP5 code 3926.
Employers are not responsible for calculating the “split” in contributions and reporting it separately: this task will be handled by the retirement fund.
While no payroll adjustments are necessary, employers are encouraged to inform their employees about these changes and their potential impact. DM/BM