South Africa is introducing significant changes to its retirement system, giving individuals more flexibility with their pension funds. The new “two-pot” system allows for accessing a portion of retirement savings before reaching retirement age in case of financial need or desire. From September 1, contributions to retirement annuity funds will be split into two “pots.” One pot will contain a third of the savings, which can be withdrawn before retirement, while the second pot will preserve two-thirds of the money, which can only be accessed after retirement.
The first pot can be drawn on once every tax year but is subject to taxes. All retirement fund members will automatically become part of the two-pot system, except for legacy retirement annuity members and members of provident or preservation funds who were 55 years or older on March 1, 2021. Under the new system, 10% of existing retirement savings, up to a maximum of R30,000, will be moved into the new savings pot.
Adri Messerschmidt, senior policy adviser at the association, said this is a one-time event aimed at giving retirement fund members the opportunity to withdraw some money if they find themselves in great financial difficulty. However, she warned that withdrawing money from the first pot is considered income and will be taxed by the South African Revenue Service (Sars). Messerschmidt also cautioned that taxpayers who owe money to Sars, penalties, or interest on outstanding tax may have these debts settled from such withdrawals, potentially resulting in a much lower payout than expected.
Flexibility in South Africa’s retirement funds
She emphasized that once a withdrawal request is made, the decision cannot be changed even after seeing the tax implications. Additionally, savings-pot withdrawals may incur an administration fee determined by the fund’s administrator.
To make a withdrawal, the balance in the savings pot must be R2,000 or more, and qualifying retirement fund members must submit an application form. The process is not automatic, and members will not receive an automatic deposit into their bank accounts. Richard Carter, head of assurance at Allan Gray, stated that the system aims to improve retirement outcomes while providing some access to a savings component in case of severe financial stress.
However, he cautioned against viewing it as a slush fund for consumption, as depleting it annually equates to using up one-third of the retirement investment. He advised that staying the course for the long term will result in better retirement outcomes. In the past, financially stressed individuals have gone as far as resigning from their jobs to access their pension funds, only to become reliant on social assistance in their old age.
The government has increased the grant for the elderly by R100 to R2,180, but a University of Cape Town study suggests this allowance is still insufficient to meet the needs of this population group.
