The Two-Pot System
What you need to know
Two-Pot Retirement System: Overview for Financial Advisors
The Two-Pot Retirement System is a framework designed to enhance the flexibility and security of retirement planning for clients. Under this system, a portion of a client's retirement savings can be accessed before retirement for emergencies, while the majority of their savings remain invested for their future retirement.
Client Eligibility:
This system applies to South African individuals with pension funds, provident funds, retirement annuities, or preservation funds. Clients with a provident fund who were 55 years old or older as of March 1, 2021, have the option to continue with the previous system or transition to the new one.
How it works:
From September 1, 2024, retirement contributions will be split between two pots:
Savings Pot: One-third of the contributions will go into a savings pot, which can be accessed prior to retirement for unforeseen financial needs. Clients can withdraw funds once per tax year, between March 1 and February 28.
Retirement Pot: Two-thirds of the contributions will be allocated to a retirement pot, reserved for funding income in retirement. These funds will be preserved until the retirement date.
There will also be an initial allocation of 10% of the client's existing retirement savings (up to a cap of R30,000) to the savings pot as a starting balance. Contributions prior to September 1, 2024, will be ring-fenced as a "vested pot" and remain subject to the existing rules.
Key Points for Financial Advisors:
Withdrawal Rules: Clients may withdraw a minimum of R2,000 from their savings pot, with no upper limit. However, they can only make one withdrawal per tax year.
Initial Allocation: The system will start with a one-time allocation of 10% of the existing retirement savings (capped at R30,000) into the savings pot.
Fees and Taxation: Clients will incur an administration fee for withdrawals and must pay tax on the benefit according to their marginal tax rate.
Employment Changes: Clients with a pension or provident fund who leave their job can only cash out the savings pot if the balance is less than R2,000 or they have not already made a withdrawal in the tax year. Otherwise, the benefit must be preserved.
By understanding the details and nuances of the Two-Pot Retirement System, financial advisors can offer clients tailored advice to optimize their retirement planning and ensure their financial security.
