To address the first point, in 2015 the government introduced tax free savings accounts hoping to encourage more personal savings. These accounts have improved personal savings but are however curtailed by restrictions in how much one can add to these savings, and the fact that individuals have full access to these funds at any time.

With regard to the second point, historically South Africa has had 3 separate retirement savings vehicles, all subject to their own rules. These were Pension Funds, Provident Funds and Retirement Annuities. The problem with these structures was that in some cases the contributions were tax deductible and in others they were not, and in some funds you could access the full amount at retirement in others you could not.

In March 2016 legislation was introduced that harmonised all retirement funds to the extent that all new contributions became deductible up to 27.5% of taxable income with a maximum deductible amount of R350,000, and all new contributions were subject to the rule that only 1/3 can be withdrawn at retirement and the balance must be used to buy an annuity.

These changes outlined above encouraged additional savings, but they have not materially changed consumer behaviour. The tax-free savings accounts are often withdrawn on a “rainy day” and employees continue to resign from their jobs in order to access their retirement savings in times of financial distress. Most importantly, these changes have not solved the problem of substantial post-retirement dependency on the state.

To reduce this dependency on state grants the South African government have been searching for ways to ensure some of these funds are carried through to retirement on a compulsory basis. To solve for this the new two-pot retirement system will take effect from the 1^st of September 2024.

This new structure aims to strike a balance between a) providing liquidity to individuals who may be experiencing financial distress and b) ensuring that individuals have some capital “locked away” to provide annuity income after retirement.

So how will the two-pot system work?

Essentially there will be a line in the sand from 1 September. This means that the funds that were saved before this date will be ringfenced and become your “vested” portion, and the funds saved after the date will fall into the two-pot portion. The amendment is referred to as the two-pot system because retirement savings from 1 September will be separated into two “pots”, namely a savings pot, and a retirement pot.

The main components of one’s retirement savings post 1 September are as follows:

The vested portion:

This portion will be subject to the rules of one’s respective funds as they stood prior to 1 September. No further contributions can be added to the vested component and all contributions after 1 September will be split between the new savings pot and retirement pot.

In line with the old rules, if one resigns one can still access the full vested component as a lump sum withdrawal or transfer the capital to another fund. One can elect, as a new third option, to transfer the full benefit to the newly formed retirement pot. Any withdrawals will be taxed in line with the traditional withdrawal tax tables.

When one retires the old rule regime will apply in line with the 1/3 withdrawal rule in the case of Pension funds and Retirement Annuities, or full withdrawal in the case of the vested Provident Fund component. Any lump sums taken at retirement will be taxed according to the retirement tax tables and the R550,000 tax free portion will apply.

The savings pot:

The savings pot will initially be funded with seeding capital from one’s existing retirement savings. This will be no more than 10% of the existing savings, with a maximum cap of R30,000.

From 1 September onwards 1/3 of all contributions will be added to the savings pot.

Members will be allowed to make 1 withdrawal per tax year. The minimum amount that can be withdrawn is R2,000 and there is no maximum amount. It is important to note that these withdrawals will be taxed as income at one’s marginal rate of tax. The old withdrawal tax tables do not apply to the new savings pot. This also means that, because they are taxed as income, withdrawals from the savings pot do not reduce one’s R550,000 tax free benefit at retirement.

At retirement individuals can withdraw all, or part, of the savings pot as a lump sum. In keeping with the existing rules the lump sum benefit will be taxed as per the retirement fund tax tables and one will still benefit from the R550,000 tax free portion.

The retirement pot:

The retirement pot will be funded by the remaining 2/3 of your contributions from 1 September.

All administration fees and risk premiums (where applicable) will be deducted from this pot.

The funds in the retirement pot are only available at retirement and must be used to buy a compulsory annuity. No lump sum withdrawals will be permitted from this component.

It is important to note that these funds cannot be accessed at resignation. The only time one can access these funds prior to retirement is in the case of emigration at which point the 3-year rule will apply.