South Africa’s retirement landscape is undergoing a significant transformation with the introduction of the two-pot retirement system. This new structure aims to provide better financial security and flexibility for retirees while addressing some of the challenges faced by the current system. South Africa’s two-pot retirement system represents a progressive approach to retirement savings blending long-term security with short-term flexibility. 

What Is The Two-Pot Retirement System?

The two-pot retirement system is a reform to South Africa’s retirement savings framework. Under this system, retirement savings are divided into two distinct “pots” or accounts: a retirement pot and a savings pot. This approach is designed to balance the need for long-term retirement security with the flexibility to access a portion of savings before retirement.

According to Parliament from the 1st of September 2024, SA’s new two-pot retirement system will allow fund members the flexibility to access their retirement savings in times of emergencies without needing to resign.

How It Works

1. The Retirement Pot

The retirement pot portion of the two-pot system is dedicated solely to retirement and cannot be accessed until the individual reaches retirement age.

• Contributions: A portion of monthly contributions to the retirement fund goes into this pot.
• Access: Funds in this pot are locked in until retirement, ensuring that individuals have a secure financial cushion for their retirement years.

2. The Savings Pot

This new savings pot portion provides liquidity and allows individuals to access a portion of their savings before retirement for emergencies or significant expenses.

• Contributions: The remaining portion of monthly contributions goes into this pot.
• Access: Funds can be withdrawn from this pot under specific conditions, providing more flexibility for savers.

South Africa’s Current Economic Landscape Is A Hurdle For Many

Economic instability and uncertainty make it challenging for South Africans to prioritize retirement savings over immediate financial needs. With the cost of essential services and goods continually rising, many individuals are forced to deplete their savings to cover basic expenses or unforeseen emergencies. 

This situation is worsened by limited access to comprehensive financial education and planning resources, leaving many without a clear strategy for building and maintaining their retirement funds. According to the FNB Retirement Insights Survey, nearly 50% of South Africans are not actively preparing for their retirement mainly due to economic challenges and a lack of financial knowledge.

The Benefits Of The Two-Pot System

The two-pot system allows access to retirement savings during financial hardships without high-interest loans or other costly financial measures. Furthermore,  the retirement system safeguards consumers for long-term security and promotes better financial well-being. By giving consumers access to their savings the two-pot system can reduce the need to take on additional debt such as payday loans or high-interest credit which can exacerbate financial difficulties.

Note: Each member will be limited to one withdrawal per tax year.

Challenges And Considerations

Withdrawals from the savings pot will be subject to taxes, which would reduce the amount of money available for immediate use. Individuals need to understand the tax implications and plan accordingly. While the ability to access savings in an emergency is beneficial it is important to remember that frequent withdrawals can diminish the overall retirement fund potentially impacting financial stability in retirement. Therefore, citizens need to use the savings pot judiciously and consider the long-term consequences.

The CEO of VDM mentioned that the two-pot system could present challenges for individuals in South Africa.

“Consumers should try to avoid the temptation to use their savings unnecessarily. Although it is an option, using your savings will reduce your future earnings and income in retirement. You should try to have a separate savings account for emergencies and leave your pension money untouched. Using your retirement savings pot should be a last resort as it diminishes the value you have created throughout the year.”

What Does It Mean For Current Policy?

The introduction of the two-pot system marks a significant departure from the conventional single-pot retirement savings approach. This revamped retirement system aims to address the immediate financial needs while also paving the way for a brighter future for employed South Africans.

1. Improved Financial Security: Locking savings until retirement prevents early fund depletion, ensuring enough resources for later years.

2. Enhanced Flexibility: Limited pre-retirement withdrawals from the savings pot help individuals handle financial emergencies without jeopardizing their long-term retirement savings.

3. Policy Adjustments: Existing retirement funds and pension schemes will need to adapt to the new structure, requiring updates to administrative processes and fund management strategies.

Potential Payouts

Under the two-pot system, the division of contributions typically involves a specified ratio, such as 70% to the retirement pot and 30% to the savings pot. The exact ratio may vary based on policy specifics. Here’s a simplified example of how it could work:

• Monthly Contribution: R6,000
  • Retirement Pot: R4,200
  • Savings Pot: R1,800

With annual growth and ongoing contributions, the retirement fund will grow significantly, establishing a strong financial base for retirement. The savings pot, while smaller, offers immediate liquidity for short-term needs.

Taxation

According to Campbell-Harris, it’s important to consider the costs and taxes that will be taken out of your withdrawal. These deductions may be higher than you expect, especially if you are part of a defined-benefit fund. The two-pot retirement system incentivizes long-term savings with tax benefits for immediate withdrawals.

1. Retirement Pot

• Tax Benefits: Contributions to the retirement pot typically enjoy tax deductions, reducing the individual’s taxable income.
• Withdrawals: Upon retirement, withdrawals from the retirement pot are subject to tax based on prevailing retirement tax tables, which may offer preferential rates.

2. Savings Pot

• Tax Treatment: Contributions to the savings pot may not qualify for immediate tax deductions.
• Withdrawals: Withdrawals from the savings pot before retirement are taxed as ordinary income to discourage non-essential withdrawals.

The two-pot retirement system can be a valuable tool for South Africans facing financial difficulties, offering a way to manage immediate needs without completely sacrificing future financial security. However, individuals need to know the potential tax implications and long-term impacts of accessing their savings pot. Using this system wisely and seeking financial advice helps consumers navigate hardships and secure their retirement.