How to Make Withdrawals with the New Two-Pot Retirement System in South Africa

The two-pot retirement system, implemented in South Africa in March 2024, allows individuals to access a portion of their retirement savings before reaching retirement age while preserving the bulk of their funds for when they retire. This system was introduced to provide financial flexibility for emergencies while ensuring that individuals still save enough for their retirement. Below is a detailed guide on how to make withdrawals under the two-pot system.

Overview of the Two-Pot System

The two-pot system divides your retirement contributions into two parts:

1. Accessible Pot:

• One-third of all contributions made after March 1, 2024, are placed into this pot.
• This pot can be accessed before retirement for emergencies or other needs, subject to taxation.

1. Preservation Pot:

• The remaining two-thirds of your contributions go into this pot.
• This pot is preserved for retirement, and you cannot withdraw from it before the age of 55 (or your retirement age).

Conditions for Making Withdrawals

Withdrawals from the accessible pot are permitted under the new system, but there are some rules and limitations. The key points are:

• Only new contributions: You can only withdraw from contributions made after March 1, 2024. Previous contributions (made before this date) are fully preserved and cannot be withdrawn early.
• Withdrawal limits: You can only access up to one-third of your post-March 2024 contributions. This portion is set aside specifically for early withdrawals.
• Tax implications: Withdrawals from the accessible pot are taxed according to your marginal tax rate (similar to other income). This means that the actual amount you receive after taxes will be less than the amount withdrawn.
• Fund rules: Each retirement fund may have specific rules regarding how withdrawals are processed, and the frequency with which you can make them, so it’s essential to consult your fund administrator.

Steps to Make a Withdrawal from the Two-Pot System

Step 1: Confirm Eligibility to Withdraw

Before you begin the withdrawal process, check if:

• Your contributions have been made after March 1, 2024.
• You have sufficient funds in the accessible pot (one-third of contributions post-March 2024).

Review your latest retirement fund statement to ensure you have money available for withdrawal. If you’re unsure, contact your retirement fund administrator.

Step 2: Contact Your Retirement Fund Administrator

Each retirement fund may have its own procedures for handling withdrawals. You will need to contact your retirement fund administrator or your employer’s HR department to:

• Inquire about the process for making withdrawals.
• Obtain the necessary forms and documentation.

Step 3: Fill Out the Withdrawal Application

Once you’ve contacted your retirement fund, you’ll need to complete the withdrawal form. The form typically requires you to provide:

• Your personal details (such as name, ID number, and fund membership number).
• The amount you wish to withdraw.
• The reason for your withdrawal (if required by your fund).

Step 4: Submit Required Documentation

In some cases, your fund may request supporting documentation, especially if you’re withdrawing due to an emergency. This could include:

• Medical bills.
• Proof of financial hardship.
• Documents showing loss of income or urgent financial obligations.

Check with your fund administrator about the documentation required, as rules may vary.

Step 5: Review Tax Implications

Withdrawals from the accessible pot are subject to taxation. The retirement fund will deduct the applicable tax before paying out the funds. The tax rate depends on your total income for the year, as withdrawals are taxed at your marginal income tax rate.

It’s important to understand how much tax will be deducted to avoid any surprises when receiving the payout.

Step 6: Wait for Processing

After submitting the withdrawal application and any required documents, there will be a processing period. This timeframe varies depending on your retirement fund, but typically it takes anywhere from a few days to several weeks to complete.

During this time, the fund will:

• Verify your information.
• Calculate the tax to be deducted.
• Approve the withdrawal.

Step 7: Receive Your Funds

Once the withdrawal is approved, the funds (after tax deductions) will be transferred to your bank account. You can use the funds as needed, whether it’s for emergencies or other expenses.

Important Considerations When Making Withdrawals

1. Impact on Retirement Savings:

• While the accessible pot allows early withdrawals, any funds taken out will reduce the overall amount you have available at retirement. This could impact your retirement income. It’s important to balance your short-term financial needs with your long-term retirement goals.

1. Tax Burden:

• Withdrawals from the accessible pot are taxed, which means the actual amount you receive may be significantly lower than expected. It’s advisable to calculate the potential tax impact before making a withdrawal.

1. Frequency of Withdrawals:

• Some retirement funds may limit how often you can make withdrawals from the accessible pot. This helps prevent excessive depletion of funds and encourages members to save more for retirement. Check with your fund administrator for specific rules.

1. Financial Planning:

• Before making any withdrawals, consider consulting a financial advisor. They can help you evaluate whether withdrawing from your accessible pot is the best option, taking into account your current financial situation, the tax implications, and your long-term goals.

1. No Access to Preservation Pot:

• Remember that the preservation pot (two-thirds of your contributions) is strictly reserved for retirement and cannot be accessed before retirement age, even in emergencies. Make sure you have other savings or financial options for emergencies if possible.

Frequently Asked Questions (FAQs)

1. Can I withdraw from both the accessible and preservation pots?
   No, you can only withdraw from the accessible pot. The preservation pot is locked until you retire.
2. How often can I withdraw from the accessible pot?
   This depends on your retirement fund’s rules. Some funds may limit the number of withdrawals you can make per year.
3. Is there a minimum amount I can withdraw?
   Some funds may impose a minimum withdrawal amount. Check with your retirement fund for specific limits.
4. What happens if I withdraw from my accessible pot regularly?
   Frequent withdrawals can significantly reduce your retirement savings, which may leave you with less income in retirement. It’s crucial to withdraw only when necessary.
5. Are there penalties for early withdrawal?
   There are no penalties for withdrawing from the accessible pot, but your withdrawal will be taxed as income.
6. Can I replenish the accessible pot after making a withdrawal?
   No, once you’ve withdrawn from the accessible pot, the withdrawn amount is not replenished. Future contributions will continue to be split into the two pots, but withdrawals reduce the accessible pot permanently.
7. Can I make withdrawals if I’m unemployed?
   Yes, if you have sufficient funds in your accessible pot, you can withdraw even if you’re unemployed, subject to the fund’s rules.
8. Do I need to provide proof of an emergency to withdraw?
   Not necessarily. While the system is designed to help during emergencies, many funds allow withdrawals without needing to justify the reason.
9. How do I check my accessible pot balance?
   You can check your balance by reviewing your retirement fund statements or contacting your retirement fund administrator.
10. What happens to the accessible pot if I don’t make any withdrawals?
    If you don’t make any withdrawals, the accessible pot remains part of your retirement savings, and it can be accessed when you retire.

Conclusion

The two-pot system offers a balance between immediate financial flexibility and long-term retirement security. By following the steps outlined above and considering the impact on your retirement savings, you can make informed decisions about withdrawing from your accessible pot when necessary. Always consider consulting a financial advisor to ensure you’re making the best choice for both your present and future financial well-being.