From 1 September 2024, your retirement fund contributions will be split into two pots. One-third will go into a savings component or 'savings pot' that can be withdrawn once every tax year. The remaining two-thirds will go into a retirement component or 'retirement pot' that cannot be withdrawn, even if you leave your employer.
To kickstart the two-pot system, 10% of your retirement savings accumulated up to 31 August, up to a maximum of R30,000, will be 'seeded' into your savings pot, which you can withdraw if necessary.
There is no need to resign in a panic. The remaining retirement savings and growth accumulated up to 31 August 2024 will be kept in a vested component that you can still withdraw from in future should you decide to leave your employer.
South Africa is one of the most income unequal nations in the world. Many South Africans face the challenge of balancing their immediate and present financial needs with saving for the future when they can no longer work. .
While the two-pot system will increase withdrawals from retirement savings in the short term, it will provide South Africans with a safety net to access money in an emergency without having to resign to withdraw from their retirement savings. Over the long term, we will see a dramatic increase in the amount of money in our retirement funding system..
From 1 September, your retirement savings will be spread across three components. You will have a vested component, which is everything you have saved up to 31 August 2024. If you change jobs in the future, you can still withdraw from your vested component.
Up to one-third of your vested component can be taken as cash at retirement. The remaining two thirds must be taken as an annuity that gives you an income in retirement.
Your retirement contributions from 1 September will be invested into two pots:
- A savings component you can withdraw from once every tax year
- A retirement component you cannot withdraw from until you reach retirement age. At retirement, all the funds in this component must be put towards an annuity.
The de minimis rule is a legal concept allowing disregard for trivial matters. De minimis is Latin for 'about minimal things'.
In the two-pot context, if two-thirds of your total pension that you must take as an annuity is less than R165,000, then you can take it as a lump sum. After March 2021, the de minimis rule was applied to two-thirds of your pension plus two-thirds of your provident funds saved after that date (your non-vested benefits).
With the two-pot system, the de minimis rule applies to two-thirds pension, two-thirds of the non vested provident benefits, and the retirement component. If that is under R165,000, then you can withdraw all of it as a lump sum. This rule applies to each separate retirement account you have.
You cannot access your retirement component or 'retirement pot' if you resign. However, the vested component (everything you have saved until 31 August 2024) is the same as before - you can withdraw it when you resign in future.
You can access your savings component anytime, but only once in a tax year, including when you change employers.
If you need money for emergencies when changing jobs, then you should consider withdrawing from your savings component instead of taking out your entire vested component. If you need money later, you'll still have access to your preserved vested component unless you transfer it to another retirement fund.
You should always seek financial advice. A withdrawal from your vested component will be taxed according to the retirement tax rates, while withdrawals from your savings pot are taxed at your personal tax rate.
Think of seeding as kickstarting your savings pot so that funds are available should you wish to withdraw. From 1 September, 10% of your savings accumulated up to 31 August 2024 will be transferred into your savings pot up to a maximum of R30,000. Each of your savings instruments - a retirement annuity (RA), preserver, pension fund, provident fund, or even preserved assets in a certain fund - will be 'seeded'.
If you were 55 or older on 1 March 2021 and your retirement savings are still invested in the same provident fund they were in 2021, then your savings will not be automatically invested into different pots. You will have 12 months from 1 September to request your fund administrator to transfer the funds into different pots.
You shouldn't opt into the two-pot system if you want to keep your rights to a full lump sum withdrawal at retirement and not have future contributions going to a retirement component that must be used to buy an annuity.
You should only opt into the system if you want immediate access to a savings component without resigning from your job.
If you change jobs or your employer moves your provident fund to another provider, your contributions to the new fund will automatically be part of the two pot system, so the decision is then made for you.
To withdraw, you need:
- Your tax number, as withdrawals from the savings pot will be taxed at your personal income tax rate. SARS will issue a tax directive with the amount of tax we must withhold before paying out.
- Your cellphone number so we can get in touch to verify your identity.
- ID or passport number that matches the details SARS has associated with your tax number.
If you don't have a tax number, you must apply for one from SARS (link to: https://www.sars.gov.za/individuals/how-do-i-register-for-tax/) and provide it to your employer so they can update their systems and your retirement provider.
If you don't have a cellphone number, you can log in to our member zone (link to: Member Zone) and submit the savings withdrawal request using your registered email address.
There is no limit to withdrawals. You can withdraw however much you've saved in your savings pot. The only limiting happens on 1 September 2024 - on how much is transferred from your vested component to your savings. That's the R30,000. Basically, only the starting value is at most R30,000. Thereafter, the sky's the limit, depending on much you're contributing to your savings pot.
You can withdraw once every tax year, at any time. For example, you could make a withdrawal on 28 February of one tax year, and on 1 March (the next day, which is a different tax year), assuming you didn't cash in your entire savings pot.
Your first potential withdrawal may take some time. Give your retirement fund provider a week or two to calculate and implement your seed capital funding into the savings component.
From there, it depends on your provider's ability to pay these claims quickly. Some providers will be flooded with manual claims, and you can expect long delays. Others will have digital straight through applications, so you might be able to get your money quickly.
Because there's now an easily accessible portion of your retirement savings, a retirement fund can place certain restrictions on withdrawals. Restrictions can apply to circumstances like divorce, pension-backed loans, maintenance claims and employer debt claims.
If a divorce order has been filed, your retirement fund can restrict withdrawals from your savings pot if the withdrawal could result in insufficient funds left in your retirement savings to settle the divorce order claim.
The legislation is stricter on issuing loans. A pension backed home loan cannot be granted if a divorce order has been issued.
If a loan is already in place, the fund can restrict withdrawals from the savings pot if there won't be enough funds left over to settle the loan.
Maintenance is financial support paid to a former spouse to help with child-related costs. If a maintenance order has been issued against your retirement savings, the retirement fund can restrict your withdrawals. This will apply if there is a formal written notice from the investigating officer authorising the restriction.
If an employee has been involved in criminal activity and the employer is suing that employee, the employer can issue a notice to the fund to restrict withdrawals. The fund will then restrict withdrawals if there would be insufficient funds left over to settle the employer's claim. However, in this case, restrictions may last 12 months. The claims can take a long time to settle in court, so it's up to the employer to resolve the claim as soon as possible.
After emigrating, you will have to wait three years to access your retirement funds. This it to avoid 'staged' or fake emigrations to access funds. Ultimately, the intention is to protect the integrity of South Africa's retirement system, ensuring that retirement funds are used for long-term savings. In the same way, the two-pot system is trying to prevent people from resigning to access their funds.
These restrictions exist on retail retirement savings like retirement annuities (RAs) and preservers - pension and provident funds are just catching up with that legislation.
Under the two pot system, the rule will apply to all your pots immediately after you lose your South African residency or work permit. But technically, the day before you lose your residency, you could still withdraw your vested and savings components.
You will be taxed at your personal income tax rate if you withdraw your savings component. SARS may also deduct any money you owe them from the remaining withdrawal amount.
If you don't withdraw, you'll still enjoy your retirement tax benefits, which include:
- Lower tax deductions according to the retirement tax tables
- Tax-free growth
- R550,000 lifetime tax-free allowance on lump-sum withdrawals
We believe you shouldn't change your investment strategy. Let's say you split all your money into 66% aggressive assets and 33% money market. The average money market returns 6% to 7%. If you withdraw every year, you'd get that growth and then withdraw.
Looking at the Alexander Forbes Investable Global Large Manager Watch over the past 15 years, the typical balanced strategy had:
- 10% of one-year returns negative, averaging -7%
- 90% of one-year returns positive, average +13%
- An overall average of 11%
So if you planned to withdraw at the end of every year, you'd miss out on an extra 4% to 5% yearly return on average, including years where your balance might have been a bit less because of negative returns.
If you started every savings pot yearly with R50,000, over 30 years, you would end up having been able to withdraw R2,000 less each year, or a total of R60,000 less over the entire term.
Then, if you don't withdraw - let's say conservatively, an aggressive return is 11%, and a money market is 7%:
- R100,000 split 1/3 at 7% and 2/3 at 11% gives you R1.6 million after 30 years.
- R100,000 invested all at 11% gives you R2.3 million after 30 years - that's R700,000 more.
You can transfer all your savings to the new fund if you change jobs. You can also split the transfer, for example, leaving 50% in your current fund and transferring the remaining 50% to the new fund. However, the 50% will be applied to all pots - you can't transfer specific pots.
Also, savings pot withdrawal rules apply per fund, so the one withdrawal per tax year allowance will be reset.
Technically, you could retire later under the two-pot system. Previously, if you stopped working and wanted to access your funds, you had to withdraw all your money - either in cash or by buying an annuity.
Because there is now a regularly accessible savings pot, when you stop working, you can withdraw from that savings pot without having to 'retire' or cash out the other pots.
Remember that those withdrawals are taxed at your personal income rate, instead of retirement withdrawal rates. However, if you've stopped working, your income for the year will probably be lower, even including savings pot withdrawals, so you may end up in a lower tax bracket. You should do the maths, but the accessibility of the savings pot could be a useful tool in the early retirement years.
It's a good idea to make tweaks to benefit structures to ensure you have a structure that responds to the change.
Everyone will be able to withdraw up to one-third of all future contributions. Therefore, for your contribution to a retirement income to remain the same, you would need to contribute 50% more. After one-third is deducted, the remaining contribution is the same as the current one.
The structure should have a higher 'default' rate but allow employees to opt down to the current level. That way, you can nudge toward the right result while allowing for affordability.
The structure should allow contribution flexibility so people can change their contributions in response to how they have withdrawn in the past.
Ideally, the provider should help employees plot and implement a contribution increase plan to close their gap and respond in real-time to their withdrawals. Discovery is currently the only provider that does that.
There are approximately R4.8 trillion in assets in South Africa's retirement funding system. Ten years ago, it was around R2.8 trillion. The interesting thing is that you could simulate that growth on a spreadsheet, using assumptions of:
- Contributions: 10% of an average salary of R20,000 per month
- Number of contributors: Approximately 15 million South Africans
- Investment growth rate: 10% per year
- Employer turnover: 15% yearly
- Preservation rate: 15% of resigning employees preserving their assets
That shows that R4.8 trillion is where we have got to with low preservation rates.
If you changed that preservation assumption to 66%, assuming everyone withdraws their full savings pot every year, and retirement pots must be preserved, the current retirement assets would be at R9 trillion.
For the average South African, this would mean double their assets at retirement. At Discovery, we see members on track to replace between 20% and 30% of their income in retirement. Double that to 60%, and things are looking much better.
But that's under a fully implemented two pot system. We'll still have our vested components. So, in the future, we're going to live in a 'blended' system, but the example illustrates the extent to which the two pot system will ultimately improve retirement outcomes.
As an employer, you must ensure your employees are ready for a zero-resistance withdrawal process.
Use the acronym TIP:
- Tax - Make sure employees have tax numbers included in their retirement fund data to comply with SARS requirements for tax directives on all withdrawals.
- ID and cellphone numbers - Regularly update employees' cellphone and ID or passport numbers and share these with retirement fund administrators monthly to ensure smooth verification for withdrawal requests.
- Platform - Ensure members can log in to their administrator's digital platforms to efficiently facilitate withdrawal requests. There will be a surge in volumes.
Australia has superannuation (ie, retirement) accounts with mandatory 10% contributions and mandatory preservation barring emergencies. Theirs is one of the leading systems in the world.
South Africa is one of the most income unequal nations in the world. In our country, there's a pressing need to balance that social fragility and needs of today, with the very real need to have enough money when you can no longer work.
Yes, withdrawals will increase in the short term, but people will feel some relief from the access to cash, without having to resign from employment. But over the long term, we'll see a dramatic increase in the amount of money in our retirement funding system.
You must reassess your retirement fund providers now to ensure they can handle the legal and operational requirements for efficient withdrawals. Do this as soon as possible because for any Section 14 transfers still in progress on 1 September, it will still be the responsibility of the transferring fund to pay withdrawal claims.
Also, communicate. Ensure your employees know about vested rights, tax registration, seeding, rules for employees over 55, and the importance of only withdrawing funds when necessary.
Look at the French. They have a government funded pension, so the government had to defer the national retirement age from 62 to 64 because of increasing longevity making the system increasingly unaffordable.
The US system is like ours, but they're also battling with insufficient savings, so they're looking at an expanded social security net and enhanced tax incentives.
Australia has superannuation (ie, retirement) accounts with mandatory 10% contributions and mandatory preservation barring emergencies. Theirs is one of the leading systems in the world.
South Africa is one of the most income unequal nations in the world. In our country, there's a pressing need to balance that social fragility and needs of today, with the very real need to have enough money when you can no longer work.
Yes, withdrawals will increase in the short term, but people will feel some relief from the access to cash, without having to resign from employment. But over the long term, we'll see a dramatic increase in the amount of money in our retirement funding system.