On the 1st of September, the two pot retirement system was implemented in South Africa by the National Treasury.
The main aim for the implementation of the two-pot system is to allow citizens of the republic partial withdrawal from their retirement fund for any emergencies that may occur, while still preserving a portion of the fund for life after retirement. When these partial withdrawals are made, a separate inaccessible savings portion will remain in the retirement fund.
How does it work?
The accumulated sum of all your retirement savings up until the 31st of August 2024 will be allocated to a vested component. The normal rules and regulations pertaining to tax tables and rights of access will continue to apply to this component.
From this vested component, a seed amount will be taken to your savings pot which will be 10% of the vested fund but limited to R30 000; the remainder will be kept till retirement. The savings account will be accessible at any time before retirement – limited to one withdrawal per year at a minimum of R 2 000 and a maximum of R 30 000.
Going forward, all retirement contributions made after the 1st of September will be split into 3 parts, with one third of the contribution being allocated to your savings component. This component will eventually be transferred to your retirement component, however, should you be faced with any emergencies before retirement, you will be allowed to access this savings component, with the same limitations mentioned above. The remaining 2 thirds of your contribution will continue to be allocated to your retirement component.
The two-pot system will not be automatically applied to members who were 55 and older on the 1st of March 2021. These members have until the 31st of August 2025 to inform their fund administrators, should they wish to be part of the two-pot system.
Tax Implications
Now we get to the important part, the tax implications of the two-pot system. When opting to withdraw from your savings component, (maximum R 30 000; minimum R 2 000), SARS will be sent a tax directive by your fund. This of course means that one must be registered for tax and be fully compliant with SARS before applying for a withdrawal, if not, the directive will be rejected by SARS.
When a withdrawal is made by a member, tax will be charged on the amount – the rate applied being the member’s normal marginal rate. The withdrawn amount will then be added to your taxable income at the end of the tax year, which could lead to a shift in your tax brackets, possibly resulting in a higher tax payable. Any debt owed to SARS will be deducted from the amount withdrawn, however, if you have a payment arrangement for your debt with SARS, your withdrawal will not be affected. The balance remaining after administrative fees and tax deductions will be paid into your bank account.
For taxpayers who earn below the threshold, the tax implications of withdrawing from the savings pot will be finalised during the annual filing season when total taxable income is determined.
Should a member choose not to withdraw from their savings pot, normal tax implications will apply, that is, the funds left in the vested component will be taxed at a lump sum when withdrawn at retirement. The benefit of this is that this tax rate at retirement is generally lower than the rate applied on withdrawals made before retirement.
SARS encourages pension fund members not to visit their branches regarding the two-pot system. All necessary information and contact details can be found on the SARS website.