Note: Once you are done with this article, read the second one which answers most questions you might have on the two pot retirement system which went into effect from 1st September

The two-pot retirement system in South Africa allows individuals to access a portion of their retirement savings in case of emergencies. Under this system, one-third of retirement contributions are allocated to a savings component that can be accessed at any time, while the remaining two-thirds are preserved for retirement to ensure long-term financial security. To access the retirement component, individuals must be at least 55 years old, and the full amount is paid out as a retirement annuity.

This system is set to be implemented on 1 September 2024. From this date, all retirement contributions will be divided, with one-third going to a savings pot and two-thirds to a retirement pot.

The government is introducing the two-pot retirement system to help South Africans balance financial stability with flexibility. It allows partial withdrawals for emergencies while safeguarding the bulk of savings for retirement. This approach addresses past issues where individuals could cash out their entire pension savings when changing jobs, leaving them with nothing for retirement.

How does the two-pot retirement system work?

Your retirement contributions will be divided into different components, or pots.

Your accumulated retirement savings up until 31 August 2024 will go into a vested component. From 1 September 2024, one-third of contributions will go into a savings component and the remaining two-thirds will go into a retirement component.

It’s important to note that there will be a once-off compulsory transfer of 10% of your retirement savings on 31 August 2024 (capped at R30 000) to the savings component. The rest of the money will remain in your vested component.

Going forward, both the vested and retirement components will remain subject to the current restrictions, while the savings component will be accessible at any time before retirement as a “rainy day” fund.

Can I withdraw my whole pension pot?

Under the two-pot retirement system, you can only withdraw one-third of your retirement component upon retirement. The remaining balance will be distributed as fixed monthly payments. This system aims to balance immediate financial needs with long-term financial security, offering flexibility while safeguarding retirement savings.

• The savings component will be accessible at any time as an emergency fund (subject to tax).
• The vested component will continue to be governed by existing rules and restrictions, with no immediate access before retirement or resignation. Any withdrawals will be taxed as part of your normal taxable income.
• The retirement component will be preserved until retirement, where it must be paid out in the form of an annuity.

However, once you retire, if the total amount of your vested and retirement components is less than R165 000, you may withdraw the full amount.

What is the two-pot retirement system withdrawal limit?

You can make a minimum withdrawal of R2,000 from the savings pot, with no maximum limit. Withdrawals are permitted once per tax year, between 1 March and 28 February, and are taxable based on your marginal tax rate.

What happens if I do not withdraw from my savings pot?

If you choose not to withdraw from your savings pot, the remaining funds will be taxed as a lump sum benefit upon retirement, following the retirement lump sum tax table. These tax rates are generally lower than the marginal tax rates applied to withdrawals before retirement.

Is GEPF included in the two-pot retirement system?

Yes, the two-pot system also covers all defined benefit funds, including the Government Employees Pension Fund (GEPF). However, the calculation methods for the GEPF’s two pots may vary due to its defined benefit nature. Contributions to the savings and retirement pots are allocated based on the member’s pensionable service.

Is anyone excluded from the two-pot retirement system?

The two-pot retirement system applies to all retirement funds, except legacy annuity policies or inactive funds. Pensioners and provident fund members that were aged 55 and over on 1 March 2021 will not be included in the two-pot system by default but can elect to participate should they wish to.

Read More : Two Pot Retirement System – All your questions answered