How Two-Pot withdrawals will work
Recent amendments to the Income Tax and the Pension Funds legislation that gave birth to the two-pot retirement system give members of retirement funds the power to access a portion of their retirement savings, once every tax year.
With the decision whether or not to withdraw now firmly resting in your hands as a member of a retirement fund, the choices you make have never been more important. They will determine whether you will be able to maintain some financial independence post-retirement or not.
How it works
From 1 September 2024, people who have invested in retirement funds, whether through their employer schemes, a retirement annuity or a preservation fund, will get a once-off access to 10% of their existing retirement savings at 31 August 2024 (capped at R30,000) called "seeding capital". This will act as the starting capital for each members' savings pot - formally known as the "savings component". One-third of all your retirement contributions after 1 September will also go to this savings component. You can get access to this one third, provided that it exceeds R2,000 before tax and other deductions, once every tax year.
For example, let's say your employer has been contributing R300 of your monthly pensionable salary to an employer sponsored benefit fund for 11 years.
For illustration purposes, let's assume that your accumulated retirement savings in the Fund is R39,600 on 31 August 2024. On 1 September 2024, R3,960 will be transferred to the savings component in the Fund. That amount will be immediately available to you as a savings withdrawal benefit after the deduction of tax and withdrawal fees.
From 1 September 2024, one third of all future contributions will be put into the savings component. If you withdraw your accumulated savings of R3,960 immediately in the 2024 tax year, then you can only withdraw again in the next tax year (i.e. from March 2025) provided that accumulated savings in the savings component is R2,000 or more. In this example, where your annual contributions are R3,600, you may access up to one-third, or R1,200, of your annual savings each year going forward. Since, however, this is less than the R2,000 minimum withdrawal amount allowed, in this instance, you will have to wait some time into the next tax year until your savings component has reach R2,000 again before you can make another withdrawal.
The good
The Two-Pot system provides employees with access to money in emergencies while still ensuring that a full two-thirds of each employee's monthly contributions continue to be saved and invested for their retirement.
The legislation intends to provide a social relief mechanism for people in real crises to access emergency funds without incurring punitive interest rates, resorting to loan sharks or having to quit their jobs to access their retirement savings. The fact that people can now access some of their retirement savings for emergencies might also take the grudge out of contributing to employee benefit funds, increasing contributions as people realise that they can now access this money should they need it.
The bad
That said, the fact remains that employees who make withdrawals from their savings component every tax year will have significantly less when they retire than those who don't access these funds each year.
The best
Employees, on the other hand, who contribute more and leave their contributions untouched for longer stand to gain from many years of tax-free compound investment growth and a more favourable tax position available at retirement.