With the new two-pot retirement system set to be implemented on 1 September 2024, many retirement fund members are wondering what the new legislation entails and how the changes will impact them. Lydia Fourie addresses some of the frequently asked questions on this topic.
If you are feeling anxious and a bit confused about what the impending changes to the retirement system mean in reality, you are not alone. Hopefully the answers in this article will help fill in some of the gaps. You can also visit the Two-pot retirement system page for more comprehensive information.
1. What exactly is two-pot and how are my retirement funds changing?
“Two-pot” is the name that has been given to the new retirement system that will replace the existing system on 1 September 2024. The new rules being introduced aim to preserve your investments for when you retire and allow you to access some of your funds in case of a real emergency by creating two separate pots, also known as components. From the go-live date, 1 September 2024, your retirement account will comprise the following:
- A retirement component: Two-thirds of your new contributions will be allocated to a retirement component, which will be preserved until you retire. At that point, you must use the accumulated funds to purchase a retirement income product, such as a living annuity or guaranteed life annuity.
- A savings component: One-third of your new contributions will be allocated to a savings component. You will be allowed to withdraw up to the full amount accumulated in this component (subject to tax and other implications, which are explained further on) once per tax year (1 March to end-February). Should you choose not to withdraw from your savings component in any year, the full amount in the savings component will remain available for you to withdraw in subsequent years. At retirement, you can take any remaining balance as cash or use it to purchase a retirement income product.
- A vested component: The existing value of your retirement account will remain invested and be allocated to a vested component, which may be split into two parts – one that houses your two-pot vested benefit and one that contains your harmonisation vested benefit. (If you have a harmonisation vested benefit, see question 2 to understand how you will be impacted.) In addition, 10% of your vested component, subject to a maximum of R30 000, will be transferred from your vested component to your savings component through a process called “seeding”, explained further on.
It remains important to preserve as much of your investment as possible until retirement so that you can maximise the impact of compounding …
2. Will I be impacted by the two-pot system?
If you are currently a member of the Allan Gray Retirement Annuity Fund, Pension Preservation Fund, Provident Preservation Fund, Umbrella Pension Fund, Umbrella Provident Fund or any other retirement fund, you will be affected by the changes in legislation – unless you have been a member of a provident fund or provident preservation fund since before 1 March 2021 and were 55 or older on that date. In that case, you will be automatically excluded from the new system, i.e. it will not have any impact on you regarding this specific investment, but you will be able to opt in to the two-pot system should you wish to do so.
3. What will happen on 1 September 2024?
From the implementation date, all affected investors will notice changes to their Allan Gray Online account and next quarterly statement.
The existing value of your retirement account will be vested
The existing value of your retirement account will be allocated to a vested component. This will reflect as two parts if you also have a harmonisation vested benefit. The vested component, plus future growth thereon, will not be impacted by two-pot. You will not be able to make further contributions to this component.
Your savings component will have an opening balance
Your savings component will be funded with an initial once-off amount transferred from your vested component. This process is called seeding. The amount to be seeded will be 10% of the market value of your account on 31 August 2024, subject to a maximum of R30 000. If you have a harmonisation vested benefit, seeding will take a few days longer and should be completed by 5 September 2024, unless there is a transaction underway on your account, which may cause a delay.
Seeding is compulsory, but you are not required to withdraw this amount. The seeding process has no financial consequences; the only change that will impact you is if you decide to withdraw the seeded amount. If you don’t withdraw it, the seeded amount will remain in your savings component and continue to benefit from investment growth.
Your contributions will be split
From 1 September, your contributions will be split, with one-third going into your savings component and two-thirds into your retirement component.
4. What if I need to access my retirement account before retirement?
While you will be able to access the savings component from 1 September 2024, this access is intended to be used during severe financial stress, when you have no other options. It is a good idea to set up a separate savings account for emergencies to prevent having to dip into an investment intended for your retirement, as Tebogo Marite explains in her piece. It remains important to preserve as much of your investment as possible until retirement so that you can maximise the impact of compounding and the resulting benefits to allow you to retire comfortably.
How much can I withdraw and how frequently?
You will be allowed to make one withdrawal of at least R2 000 from your savings component per tax year (1 March to end-February). Once you have made a withdrawal, you will not be able to withdraw again until the following tax year, unless you cease to be a member of the fund during the tax year and have less than R2 000 in your savings component, in which case you will be allowed to withdraw the total balance in your savings component. It remains in your long-term best interest not to make any withdrawal unless you really need to.
The tax implications
Withdrawals from your savings component before retirement will be taxed at your marginal tax rate, which is the highest rate of tax that is applicable to you, according to the personal income tax table. Tax will be deducted before the withdrawal is paid to you, so be prepared to receive a lower amount than you requested.
The process
From 1 September, you will be able to submit an instruction to withdraw from your savings component via your Allan Gray Online account. To process this instruction, we will need your bank details and tax reference number. We may also request documents to verify your identity and residential address if you are a member of the Allan Gray Retirement Annuity Fund, Pension Preservation Fund or Provident Preservation Fund.
Once we receive your withdrawal instruction, we will apply for a tax directive from the South African Revenue Service (SARS). The tax directive will indicate the amount of tax that we are required to withhold and pay to SARS. If you have any outstanding taxes, SARS may also include a deduction order (IT88), which we will need to apply to your withdrawal. We will then pay the after-tax amount to you. It is important to note that once we have applied for a tax directive based on your withdrawal instruction, you cannot cancel your withdrawal.
We do not currently know how long SARS will take to issue these tax directives. Once we have received the tax directive, we will process the withdrawal within six business days.
5. What will happen if I change jobs?
You will be able to withdraw from your savings component, provided you have not already made a withdrawal in the same tax year. You will not be able to withdraw from your retirement component.
The rules that currently apply when you resign will continue to apply to your vested component. For example, if you are a member of the Allan Gray Umbrella Pension Fund or Umbrella Provident Fund, you will be able to access 100% of your vested component when you resign. These withdrawals are taxed according to SARS’s retirement fund withdrawal tax table, available on their website.
6. How will transfers work?
If you transfer your investment to another retirement fund provider, your vested, savings and retirement components (and their rights) will remain as is.
You will also be allowed one-way transfers between components of the same retirement account as follows:
- From your vested component to your retirement component
- From your savings component to your retirement component
These one-way transfers, should you choose to do them, mean that you will effectively be giving up any access rights attached to the transferred portion – in other words, you will not be able to undo a transfer if you require access to your retirement account. There may also be tax implications.
… the objective of retirement funds remains the same: to enable you to provide adequately for your retirement and the needs of your dependants.
7. Can I access my retirement account if I leave South Africa permanently?
You will still be allowed to withdraw from your retirement account if you cease to be a South African tax resident for an uninterrupted period of at least three years, as is currently the case. However, if you have a balance in your savings component, your options are as follows:
- Submit a savings component withdrawal, which will be taxed at your marginal tax rate (and not as a retirement fund lump sum withdrawal, which could be more favourable than being taxed at your marginal tax rate as it allows for a tax-free portion).
- If you have already withdrawn from your savings component in that tax year, or you want to avoid paying tax at your marginal tax rate, you can transfer your savings component to your retirement component and then make a full withdrawal from your retirement and vested components. This withdrawal will be taxed according to SARS’s retirement fund withdrawal tax table, available on their website.
8. What if I die before I retire?
There will be no change to the treatment of death benefits. If you die while you are a member of one of the Allan Gray retirement funds, the trustees of the fund will decide how to allocate your benefit between your dependants and nominees. Your beneficiaries will then be able to access the benefits across the savings component, retirement component and vested component as either a cash lump sum, or a compulsory annuity (i.e. a living annuity or guaranteed life annuity), or a combination of a cash lump sum and an annuity.
If a beneficiary decides to take a cash lump sum, the total benefit will continue to be taxed as a lump sum benefit in your hands according to SARS’s retirement fund lump sum tax table, available on their website.
9. Should I change how I invest?
The system is changing, but the objective of retirement funds remains the same: to enable you to provide adequately for your retirement and the needs of your dependants. You should not think differently about your retirement component or treat the savings component as a short-term savings vehicle. Just because you can access the cash, does not mean you should, as Shaun Duddy discusses in his piece.
In addition, the prescribed legal investment limits outlined in Regulation 28 of the Pension Funds Act will continue to apply on a retirement account level. If you withdraw from your savings component, you will need to ensure that your account remains compliant after the withdrawal (unless you withdraw proportionately).
10. What will happen when I retire?
At retirement, you will have different options for the components of your retirement account.
Savings component
You will be able to withdraw the full amount in your savings component. This withdrawal will be taxed according to SARS’s retirement fund lump sum tax table, available on their website. Alternatively, you can transfer a portion of or the entire savings component to a retirement income product, such as a living annuity or guaranteed life annuity. This transfer would not incur any tax. The annuity income you receive is then taxed at your marginal tax rate, as per the current tax treatment.
Retirement component
You must transfer the full value of your retirement component to a retirement income product at retirement, unless the amount that would have been used to purchase a retirement income product, across all your retirement accounts in the relevant fund, is R165 000 or less.
Vested component
Your vested component will be treated the same at retirement as in the pre-two-pot regime. For the most part, this means that you will be able to withdraw up to one-third as cash, while you must use the remaining two-thirds to purchase a retirement income product. Withdrawals will also continue to be taxed according to the pre-two-pot regime – i.e. SARS’s retirement fund lump sum tax table, available on their website.
If you have a harmonisation vested benefit, you will be able to withdraw the full value of that portion as cash at retirement.
If you are a member of one of the Allan Gray retirement funds … we will … communicate with you … to confirm how you are impacted.
Keeping up to date with developments
We encourage you to visit our Two-pot retirement system page for up-to-date information about the new system. If you are a member of one of the Allan Gray retirement funds (listed in question 2), we will also communicate with you in advance of the go-live date to confirm how you are impacted.