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August 22, 2024
The “two Pot System” will change retirement as we know it.
The so called Two Pot System will be implemented on 1 September 2024. This is the latest change in terms of retirement reform, and perhaps the single biggest change. This will impact on all individuals who are members of Pension or Provident Funds or who have Retirement Annuities or Preservation Funds in place to save for their retirement.
It is often quoted that only 6 in 100 average South Africans reach retirement with sufficient savings to provide an income with which they can maintain their standard of living. This is a scary statistic and does not compare favourably with the rest of the world. The Two Pot System is designed to help correct that statistic.
A significant part of the problem is that currently members of Pension and Provident Funds are allowed to withdraw their savings balance in full when they leave their company and fund pre-retirement. This could be due to resignation, dismissal or retrenchment. As a result, they will start the next phase of their career with no savings at all. In some cases people resign from their companies purely to access these funds.
Importantly, the new system will allow members to access funds pre-retirement through a “Savings Component” while locking away the balance for retirement in a “Retirement Component”.
On implementation one third of future retirement contributions will be held in the “Savings Component” with the balance being held in the “Retirement Component”. Members will be allowed to withdraw at any time from the “Savings Component” (subject to certain rules) but the “Retirement Component” is not in any way accessible pre-retirement (or death of the member). The member is compelled to purchase an annuity at retirement (again subject to certain rules) and cannot access this component as a lump sum.
The historical savings of a member will be treated according to the existing rules, and so the “two pot system” consists of more than two pots! In addition, a portion of the existing savings will be used to “seed” the “Savings Component” at inception. This will be achieved through the transfer of 10% of existing savings as at 31 August with a maximum of R 30 000.
Those over the age of 55 as at 1 March 2021 will have the option of whether or not to participate in the new system, and this decision should be discussed with your Financial Advisor.
This is a complex set of changes, and as an individual investor I recommend that you speak to your Financial Advisor to determine exactly how you could be affected. If you are a business owner or manager with a Pension or Provident Fund I suggest that you engage with staff on this topic – there are many rumours and misconceptions doing the rounds. We at Quattro will be happy to assist.
Dave Osborn
Employee Benefits Specialist
Quattro Investment Brokers
