It’s official. The two-pot retirement system is in effect.
The rules have changed, and South Africans can do more with their retirement savings. All thanks to the new ‘savings pot’.
Not sure what the new rules are, yet? We’ve got you covered.
This is South Africa’s new two-pot retirement system…
Two-pot retirement system
The two-pot retirement system introduces a new way of managing retirement savings in South Africa. It splits contributions into two distinct “pots,” each with its own purpose and rules.
This system is designed to balance long-term savings with short-term financial needs.
Let’s take a closer look.
What is the two-pot retirement system?
The two-pot retirement system is a new retirement savings system in South Africa. The system allows retirement savers to access their retirement savings by dividing their contributions into two parts. The first part is a retirement pot, which can’t be touched till retirement. The other part is a savings pot, which can be accessed during emergencies.
The 2-pot retirement system in South Africa took effect on 1 September 2024. Now savers have the flexibility to withdraw a portion of their savings while still preserving the bulk of their funds for retirement.
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How does the two-pot system work?
Under the two-pot retirement system, retirement contributions are split into two categories: the “retirement pot” and the “savings pot.”
- Retirement pot: This is the portion of the retirement contributions locked away for retirement.
- Savings pot: This part is designed to offer flexibility and allow withdrawals before retirement.
The retirement pot is reserved for long-term savings and can only be accessed when the owner reaches retirement age or retires due to disability or death.
The savings pot, on the other hand, allows early withdrawals. This way, owners have some flexibility in case of emergencies or short-term financial needs.
South Africans can withdraw from their savings pot under specific conditions. Think, emergencies. But there are limits and tax implications.
Which makes sense, right? There needs to be rules that prevent people from recklessly withdrawing from their retirement savings.
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Two-pot retirement system withdrawal limit
The savings pot in the two-pot retirement system lets South Africans withdraw funds. Within certain limits. The withdrawal limits only apply to the savings pot portion of the fund. Not the retirement portion—which doesn’t allow any withdrawals.
From 1 September 2024, one-third of contributions will be split into a savings pot and two-thirds into a retirement pot.
The savings pot allows:
- One withdrawal per tax year
- With a minimum amount of R2,000
- There is no maximum limit on how much can be withdrawn from the savings pot
- All withdrawals are taxed according to the individual’s marginal tax rate.
- Any remaining funds in the savings pot will continue to grow tax-free until there is a withdrawal.
Tax implications of withdrawals from the two-pot system
Remember, any withdrawals from the savings pot will be subject to tax.
This means that if someone withdraws money early, they may need to pay income tax on the amount. Ultimately reducing the total after-tax payout.
By now, the 2-pot system should make sense. But we want to drive it home with a practical example…
What is your estimate? *The calculation is an estimate actual amounts may vary. What is your estimate? *The calculation is an estimate actual amounts may vary.
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Two-pot system explained (with examples)
Let’s break it down with an example.
Suppose Ashley contributes R9,000 each month to her retirement fund. From 1 September 2024, under the two-pot system, R6,000 (two-thirds) would go into the retirement pot, locked until retirement, and R3,000 (one-third) into the savings pot.
After five years, her savings pot grows to R180,000.
With the new two-pot system…if an emergency arises—such as unexpected medical bills—Ashley will be able to withdraw any amount from R2,000 to the total available R180,000 from her savings pot.
If she decides to withdraw R50,000 then her savings pot balance will be R130,000 after the withdrawal.
Remember:
- Withdrawals before retirement are taxed as income: Withdrawals are taxed at your marginal tax rate.
- Withdrawals negatively affect long-term growth: Withdrawing money early means there is less money to generate interest. Which could have a significant impact on the overall balance in retirement.
Try to plan ahead and think long-term. Where possible, leave your retirement savings and the savings pot alone. Let that money grow. It’s meant to be an investment for retirement.
Try using an emergency fund for unexpected expenses instead.
In summary
The two-pot retirement system started on 1 September 2024.
Now, South Africans can access a portion of their retirement savings. Up to one-third, to be exact.
While it’s good to know that there is a backup, it’s best to let 100% of the retirement savings grow. Untouched for as long as possible.
By the way, debt plays an important part in overall financial health. The goal should be to be debt-free as soon as possible. Long before retirement.
If you want to talk to someone about managing your debt, we can help. Try our online assessment at My Debt Hero to see if you qualify to reduce your debt.
