Are you Two-Pot ready?

Last updated on 21st August, 2024 at 02:44 pm

The Two-pot system takes effect on 1 September 2024. Below is information to help you prepare.

Reading time: 3 minutes

In this article, you’ll learn:

• How the two-pot retirement system will work
• What the different pots are in the system, and how much goes into each
• How using your savings pot will affect your long-term retirement

How will it work?

From 1 September 2024, your retirement fund monthly contributions will be allocated to two pots:

Emergency Savings pot

33% of your net fund contributions will be allocated to this pot. You can make one withdrawal from this pot in a tax year, subject to a minimum withdrawal amount of R2 000.

Retirement pot

The remainder of your net fund contributions (67%) will go into this pot. The full balance of your retirement pot must be used to purchase a pension at retirement. No withdrawals are allowed from this pot.

All your accumulated retirement savings up to 31 August 2024 will be allocated to a third pot, the Vested pot, that remains unaffected by the Two-pot system. You will not be able to make further contributions to this pot and it will continue to grow.

What if I’m over-55?

Provident fund members who were 55 years or older on 1 March 2021 and who remained members of the fund until 1 September 2024 (referred to as members 55+) have the following choices:

Stay in the Vested pot and continue making contributions. At retirement, any amount in their Vested pot can be taken in cash (taxed) with the balance used to buy a pension. This is the default choice if no decision is made.

OR

Move to the Two-pot system and start contributing to the new Emergency Savings and Retirement pots. They will be able to make one withdrawal per tax year from their Emergency Savings pot.

NOTE: This option is NOT available to 55+ members of a pension fund. These members will automatically participate in the Two-pot system.

Remember: Emergency savings is for emergencies only!

Making any withdrawals from your Emergency Savings pot not only means that you will have less money when you retire, but also less money available to take in cash. It is important to consider the long-term effects of withdrawing will have on your life goals. Keeping your investment untouched for as long as possible means that it will continue to grow and benefit from compound interest.

Example of the financial consequences of withdrawing money from the Emergency Savings pot *

1. Nick and Thabiso are 40 years old and are members of their employer’s retirement fund. They both contribute R1 000 per month to the retirement fund and underlying portfolio, which grows at 10% per year.
2. Nick decides to take advantage of the new Two-pot legislation and withdraws 10% from his Emergency Savings pot every 12 months to help with various emergencies. Thabiso doesn’t withdraw and simply allows his investment to grow at 10% a year.
3. After 20 years, Nick only has R483 000 saved in his retirement fund, while Thabiso has saved R724 000, which is much more than Nick. Nick pays tax on each withdrawal, impacting the amount he takes home.

* Disclaimer: This example assumes a 10% annual growth rate of funds invested for both Savings and Retirement pots. This calculation does not take inflation, salary increases or tax implications into account. The Vested pot and implications thereof are not included in the calculation. This information does not constitute as financial advice.