The Two Pot Retirement System – what South Africans at home and abroad need to know

The South African Parliament is on the verge of passing a groundbreaking bill that could reshape how citizens access their retirement savings. The National Council of Provinces (NCOP) recently adopted the latest revisions to the Pension Funds Amendment Bill, paving the way for changes that might be made effective as early as 1 September 2024. Let’s take a look at what you need to know about South Africa’s new two-pot retirement system and how the changes might affect you.

What is the latest news on pension fund withdrawals in South Africa?

From 1 September 2024, it is anticipated that new retirement reforms will allow members to access a portion of their retirement savings before their mandated retirement date, and without having to resign from employment. What has become known as the “two-pot retirement system” has recently been officially renamed the “two-component retirement system,” and contributions to retirement funds will be split. One-third of contributions will be allocated into a ‘savings component’ and two-thirds will be kept in a ‘retirement component.’

What’s on the table with the two-pot retirement system?

The proposed “two-pot” system aims to provide South Africans with more flexibility in managing their retirement funds. Here’s a breakdown of the key points of the system as it stands currently:

• Divided savings: Retirement contributions will be split into two sections: a retirement component (two-thirds) that remains untouched until retirement, and a savings component (one-third) accessible for withdrawals under specific conditions.
• Government employee inclusion: The amendments ensure that government employees, along with those enrolled in Transnet, Post, and Telecommunications pension funds, will be included in the two-pot reforms.
• Divorce considerations: The bill addresses concerns regarding the division of assets during divorce or separation to ensure alignment with existing legal frameworks.

The rationale behind the retirement savings reform

The legislation aims to address the financial challenges faced by many South Africans. By allowing access to a portion of their pension savings, the government hopes to alleviate some of the financial pressure.

Who is eligible for the two-pot system?

The two-pot system applies to most retirement savings plans in South Africa. This includes:

• Private sector funds: Employer-sponsored retirement plans for those not working in government.
• Public sector funds: Government employee pension plans.

Who is excluded?

There are a few exceptions to the two-pot retirement system:

• Legacy retirement annuities: These are older annuity policies with different rules.
• Inactive funds: This includes funds in liquidation, beneficiary funds, closed funds, or dormant funds with no active members contributing.
• Certain existing retirees: Pensioners and provident fund members who were 55 years or older on 1 March, 2021, and have not chosen to participate in the two-pot system.

Support and skepticism surrounding the two-pot retirement system

The two-pot system has garnered support from various parties, including trade unions. They see it as a solution to the hardship caused by slow economic growth and rising living costs. It is a way for South Africans to tap into their retirement savings without having to resign from employment, and in a controlled manner that aims to protect their retirement savings as a whole.

Concerns have also been raised. Some legislators warn about the potential tax implications of withdrawals, urging for clear communication from National Treasury and the South African Revenue Service (SARS). Additionally, industry players such as the Institute of Retirement Funds express concerns about the feasibility of implementing the system by September, citing the need for adjustments to administrative infrastructure, which is easier said than done.

Next steps for the two-pot retirement system

The timeline for implementation remains uncertain at this point, with potential delays due to further review or administrative adjustments.

What you should know about the how the two-pot retirement system will work:

• This two-component system is intended to balance the need to save for retirement, with the need to meet immediate financial burdens in times of stress.
• It is hoped that the first cash withdrawals from the savings component will be permissible as of 1 September 2024. Contributions will remain tax deductible and tax-free while left to grow in the fund.
• Members will be able to withdraw from the savings component before retirement, while the other component remains untouchable until retirement.
• Savings accrued up to the implementation date will remain unaffected, except for the initial seed capital amount.
• This amount will either be 10% of the fund value as at 31 August 2024, or R30 000 (whichever is lower at the time), which will be transferred from accumulated retirement savings to the savings component.
• This seeding will be a once-off event and will still be available in the future if not used.
• Withdrawals from the savings component will be taxed at your marginal rate, like all other income but when taxable income is lower, you will be taxed at the lower rate.

Two-pot retirement system withdrawal limit

• You are permitted to make only one withdrawal in a tax year. The minimum amount is R2 000.
• While you will have the option of tapping into your retirement savings, your best bet is to keep your retirement savings untouched for as long as possible, as the amounts in both components will then grow with compound rates and can attract lower tax rates.
• Funds remaining in the savings component upon retirement can be withdrawn at this time, and taxed according to the retirement lump sum table, which makes provision for a tax-free lump sum of R550 000.

How does the two-pot retirement system affect South African expats living abroad?

The upcoming changes to South Africa’s retirement system will actually create three distinct categories for your retirement savings:

• Savings component: This will hold one-third of your future contributions. You can withdraw from this pot entirely before retirement, with a maximum of one withdrawal per year.
• Retirement component: This will hold the remaining two-thirds of your future contributions. Withdrawing from this pot before retirement is generally not allowed, but there may be exceptions for expats upon leaving South Africa.
• Vested component: This will contain all your retirement savings accumulated before the new system starts. The rules for this component remain unchanged.

Tax implications of the two-pot retirement system for expats

If you’re an expat planning to leave South Africa (or you’ve recently left), the two-pot system introduces some uncertainties regarding taxes on your retirement savings. Here’s what we know so far:

• Separate taxation: Each component (savings, retirement, vested) might be taxed differently upon withdrawal, potentially leading to higher tax burdens if not handled correctly.
• Three-year lock-in: The three-year waiting period will apply before you can withdraw any funds from the retirement pot.
• Lack of clarity: The South African Revenue Service (SARS) hasn’t yet provided clear guidelines on how expats will be taxed under the new system.

Recommendations for expats

Given the complexities of the new system, here’s what you, as an expat, should consider:

• Seeking professional advice: by consulting a tax professional specialising in expat finances. This is vital to understand the potential tax implications and undertake the encashment process smoothly.
• Planning ahead: by developing a clear roadmap for your funds. This will ensure you have considered all aspects of the process, from ceasing your tax residency, to filing accurate tax declarations, and successfully transferring your funds overseas.
• Staying informed: by keeping yourself updated on any official pronouncements from SARS regarding expat taxation under the two-pot system.

Read more:

• Understanding tax emigration from South Africa: a comprehensive guide.
• Top reasons South Africans living abroad consider tax emigration.

FinGlobal: retirement annuity withdrawal specialists

The two-pot retirement system brings changes and challenges for everyone, but expats face additional uncertainties regarding tax implications. By seeking expert guidance and staying informed, you can minimise potential tax burdens and ensure a smooth transition for your retirement savings. This is where FinGlobal can assist. Our team includes certified  financial planners, chartered accountants, tax specialists and bankers providing expertise in all areas of cross-border finance. No matter how complicated your situation is, FinGlobal is ready to lend a hand in accessing, unlocking and transferring your retirement funds out of South Africa.

To get started with our convenient, cost-effective retirement annuity withdrawal services, please leave us your contact details and we’ll be in touch soon!