Ten top tips on the planned two-pot system for retirement savings

Joon Chong, Partner from Webber Wentzel

Draft amendments have been published to introduce the proposed two-pot system for retirement savings. Here is a summary of the main features.

On 29 July 2022, National Treasury released the 2022 Draft Revenue Laws Amendment Bill for public comment until 29 August 2022 to introduce the “two-pot” system for retirement savings that was flagged in the National Budget. 

The two-pot system would allow members of retirement funds to access one-third of their pension savings once a year, in the event of an emergency, while preserving the other two-thirds for retirement. This is regarded as a better alternative to people resigning from their jobs to access their pensions or provident funds.

The planned implementation date is 1 March 2023, although Treasury said it was probably optimistic, given the necessary changes to funding rules and systems and education of members.

Below we list the “top ten” aspects of how the two-pot system is envisaged, according to the draft legislation. In practice, members of longer standing in retirement funds will have three pots: the vested pot (amounts accumulated before the implementation date), the savings pot (the one-third that is accessible) and the retirement pot (the two-thirds of contributions after 1 March 2023 that have to be preserved until retirement date).

1. Existing members of funds do not have to re-enrol to access the two-pot system, as existing funds will be adapted to accommodate it. Each fund will have to review its rules to do so.
2. Contributions will remain deductible up to the specified caps, but any contributions that are more than 27.5% of taxable income or R350 000 a year can only flow into the “retirement pot”.
3. All contributions and growth that are accumulated before 1 March 2023 (the “vested pot”) will have to be valued at the date immediately prior to implementation, to enable the vesting of rights. The conditions that were attached to those contributions will remain in place.
4. The “savings pot” will start to be accumulated from 1 March 2023, together with the “retirement pot”. 
5. Any amounts withdrawn from the savings pot will be included in the member’s taxable income for that tax year and taxed at the relevant marginal rate.
6. Only one withdrawal from the savings pot can be made a year, at a minimum of ZAR2 000. All, or part of the amount accumulated in the savings pot up to the allowable withdrawal date each year can be taken out.
7. On reaching retirement age, the member can add the savings pot to the retirement pot to purchase an annuity or can withdraw the full amount in the savings pot as cash, which will be taxed according to the retirement lump sum tables. The lump sum tables have more favourable tax rates (maximum of 36%) relative to the marginal rate tables that apply to annual withdrawals pre-retirement from the savings pot (maximum of 45%). 
8. On retirement, the total amount in the retirement pot must be used to purchase an annuity. The minimum amount that can be used to purchase an annuity is ZAR165 000, amounts less than ZAR 165 000 in the retirement pot can be withdrawn as a lump sum.
9. Before retirement, it is still possible for a member to withdraw funds from the vested pot, and, as before, this withdrawal will be taxed according to the retirement lump sum tables.
10. Although no amounts can be transferred out of the retirement pot, transfers can be made into it from other pots (vesting, savings or retirement). No transfers can be made into the savings pot, unless from other savings pots. The retirement pot and the savings pot must be held in the same retirement fund (e.g., you cannot hold the savings pot in your old employer’s fund and the retirement pot in your new employer’s fund).