The two-pot retirement system – balancing access with savings

The two-pot retirement system allows you to access a portion of your savings once within every tax year. This will enable access in an emergency, but with safeguards to preserve your funds for use in retirement.

We investigate how the system works and whether you will benefit from withdrawing funds.

Tip: Unit trusts may be what you need to supplement your retirement savings.

Inadequate savings culture

The two-pot retirement system is necessary because South Africans don’t save enough, says Cheryl van Rooyen, certified financial planner at Efficient Wealth. The reasons generally range from economic survival to a lack of proper financial education.

As a result, many dip into their retirement savings in desperate times – for example, if they’re retrenched. This means they’re unable to preserve their retirement savings, which has long-term repercussions.

Of all South Africans of retirement age, only around 6% are on track to retire comfortably, according to 10X’s recent Retirement Reality Report, an annual survey that analyses pre-retirement financial behaviour.

Access to your money

As of March 2024, retirement fund members’ savings were apportioned to three separate pots: a vested pot, a retirement pot, and a savings pot.

• The retirement pot holds a minimum of two-thirds of your contributions (the first pot).
• The savings pot will have a maximum of one-third of contributions, which you can access (the second pot).
• A vested pot will house the accumulation of all retirement savings from before the implementation of the two-pot system, which will remain subject to the current rules of the fund (the third pot).

As of 1 September 2024, 10% of your retirement savings have been allocated to your savings pot, and there is no limit to the amount you can withdraw, but you must withdraw at least R2,000.

“This gives you access to your savings when you need them most, such as in an emergency,” says Lorraine Mekwa, managing executive: client experience at Sanlam Corporate. “At the same time, the two-pot system will help increase the money you preserve for retirement.”

For now – in these early years following the implementation of the two-pot system – most retirement savings (and hence benefits) will stay in the vested pot. These funds will only be available in an occupational fund if you are retrenched, or upon retirement.

Van Rooyen adds that when you retire, whatever is left in your savings portion will be available as a cash lump sum to withdraw, while you will use the retirement portion to purchase an annuity.

Tax implications

Van Rooyen says the two-pot retirement system has new tax proposals.

“Withdrawals from the vested pot will be taxed under the pre-1 March 2024 tax provisions. All annual withdrawals from the savings pot will be included in your gross income and taxed at your marginal income tax rate.

“The retirement pot will be locked in until retirement and will be taxed per the lump-sum withdrawal table,” she says.

Pitfalls of early withdrawal

Early withdrawal may be helpful when you struggle to afford the basics, but you may regret it 20 years later when you don’t have enough retirement money, says Mekwa.

She gives the example of a fund member with R5 million in retirement savings, who withdraws R500,000.

Here’s how that withdrawal could impact the fund member’s retirement savings:

• If the member withdraws R25,000 once and still has 20 years to retirement, at a growth rate of 10% yearly compounded, the member will lose about R165,000 at retirement.
• If another R25,000 is withdrawn the following year, and each year until the total of R500,000 is withdrawn (over 20 years), with the same growth assumption of 10%, the member will have given up approximately R1.5 million of their retirement money.
• All withdrawals are taxable, so the member will not receive the full amount withdrawn. 

Mekwa says that pension fund members must understand that withdrawals take away from their final retirement money.

“It is better to resort to withdrawals only in times of serious need, rather than to spend money on things that are not worth sacrificing your retirement funds for,” she notes.

Tip: It is never too late to invest in your retirement. However small the amount, you can start today.