“I heard I can withdraw money from my Retirement Fund. Is this true?”

Covid’s long-lasting negative impact on the financial wellbeing of many South Africans highlighted the need for emergency access during times of dire financial need. With no such system in place, many individuals and companies turned to Government for assistance. To provide a long-term solution, National Treasury released the 2022 Draft Revenue Laws Amendment Bill looking to introduce the “two-pot” system for retirement savings. This system was proposed for implementation 1 March 2023, but has since been pushed out to 1 March 2024.

What is the “two-pot” system that is being proposed for retirement savings?

The short answer is that currently there is no early access to your retirement savings, however, as the proposal has been introduced in parliament and approved in principle, it is important to understand what it is and how it will work.

National Treasury’s recently released media statement reads: “The amendments enable South Africans to also save for non-retirement purposes (e.g. emergencies) via their retirement funds, whilst preserving more of their savings for retirement. These amendments aim to encourage members to preserve their retirement savings by making it more flexible to accommodate unforeseen pressures that members face during the span of their working life. It makes it possible for workers not to resign from their employment merely to access their retirement funds.”

In essence, the system seeks to find a balance between two problems that government and society face.

  1. How to secure retirement savings by minimising early withdrawals; and
  2. How to allow early access to a portion of these retirement savings to assist in times of unforeseen events, without totally depleting retirement provisions.

What does this mean for you and me, the ordinary citizens?

Even though it is referred to as the “two-pot system”, it will only pertain to contributions and savings made AFTER the law comes into effect. For those with retirement savings made prior to the legislated changes, there will be three “pots”. Let’s see why.

Assuming this system is implemented on 1 March 2024, retirement fund administrators will have to split future contributions between two “pots”. One-third to the “Savings Pot” and two-thirds to the “Retirement Pot”. However, existing retirement funds already have savings invested in them, these savings will be considered the “Vested Pot”, hence three pots.

What are the proposed conditions for withdrawing from these retirement savings?

Savings Pot – Withdrawal

  • Contributions to the savings pot will be accessed through a single withdrawal, during any 12-month period, with a proposed minimum amount of R2,000.00.
  • Any withdrawals before retirement will be taxed as taxable income in the year of withdrawal.
  • All withdrawals will account towards the amount available as a lump sum upon retirement. Effectively, every withdrawal taken before retirement will reduce the cash benefit available at retirement.
  • IMPORTANT – These changes will only apply to contributions made from the implementation date. Contributions made up until the implementation date, plus all growth on those contributions, will remain in the existing or “vested pot” and will still be subject to all the rules and entitlements that apply at the time of implementation.

Retirement Pot – Withdrawal

  • Amounts contributed to the retirement pot cannot be accessed before retirement.
  • At retirement date, the total value in the retirement pot must be paid in the form of an annuity (including a living annuity).

Vested Pot – Withdrawal

  • All contributions and growth up to the date of implementation of the new legislation will form part of the vested pot. (In this scenario, everything prior to 1 March 2024.) This could include a member’s accumulated vested and non-vested benefit plus growth.
  • Withdrawals from the vested pot will be taxed according to the retirement fund withdrawal tax tables.

How will Retirement Annuities (RAs) be treated?

RAs currently provide no early access to funds, until age 55. The proposed amendments will also apply to RAs, meaning that RA members will receive the same treatment regarding rights of early access.

This is not a simple amendment and has many factors that still need to be considered, including the conditions placed upon these retirement savings when retiring and the technical demands of making withdrawals. Administrators will need systems in place to allow for direct member withdrawals, as withdrawals from the ‘savings pots’ would not be part of a normal employment-based withdrawal. It is estimated that withdrawals could increase by between 300 and 400% when implemented and place immense pressure on Administrators and other service providers. We await and expect National Treasury to provide more clarity when they present the mid-term budget.

In conclusion

We believe the proposed amendments will go a long way to meet the requirements of households battling the economic stress of a post-Covid world.

However, before any decisions regarding withdrawals are made – should the legislation be formally passed – it is highly advisable to consult a qualified financial practitioner so one can be completely informed regarding the consequences, both present and future.