New retirement saving rules – what’s going on?

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From 1 September 2024, there will be new rules governing how you can use the money you’re busy saving for retirement. (You are saving for retirement, right?). The new rules apply whether you have a retirement annuity (RA), a provident fund, pension fund, preservation fund or a combination of more than one of these products. It’s called the two-pot retirement system and this is what you need to know:

How does it work?

The new system aims to give South Africans more control over their savings in times of financial hardship, while still allowing them to preserve money for retirement. Basically, your retirement contributions will now be allocated to two pots (think of them as separate piggy banks) called ‘savings’ and ‘retirement’. 

One third of your contributions will be allocated to the savings pot and you’ll be able to access this money in an emergency. (Previously, there were substantial tax penalties for drawing early from a retirement fund.) The remaining two-thirds will be allocated to the retirement pot and will be preserved until your retirement date. 

What will happen on 1 September?

10% of your existing retirement savings will be transferred to your “Savings” pot as an opening value, however this will be capped at R30 000 and the transfer will only happen once. From then, the one-third/two-third split will be applied to future retirement fund contributions.

You can withdraw from your savings pot once per tax year (1 March – 28/29 February) with a minimum withdrawal value of R2,000. The maximum amount you can withdraw will be the balance available in the pot. 

Withdrawals are taxed at your marginal income tax rate and each withdrawal will also be subject to a transaction fee. 

Awesome, so I have extra money every year?

No! You should only use the money in your savings pot in an emergency. It’s not for upgrading your car or for buying new curtains for the lounge. The savings pot is not meant to be a transactional account; money you withdraw will only be replaced proportionately when you contribute again to your retirement fund(s). 

What happens when I resign or lose my job?

The new system forces you to preserve two-thirds of your retirement until the day you retire. If you’re dismissed or retrenched before then, you can only access what’s in your savings pot. (Previously, even though it was a terrible idea, you were allowed to withdraw your entire retirement fund.) 

What happens to my savings pot when I retire?

You can take a portion or the full amount as a lump sum pay-out (subject to tax) or you can use the full amounts in both pots to buy an income annuity to provide an income during your retirement.  

TL;DR – give me the short version

In an emergency or during a period of financial hardship (a worldwide pandemic comes to mind), the new two-pot retirement system enables you to access a third of your retirement savings before you reach retirement age. The other two thirds remain invested until you legally retire. Of course, if you don’t need the money, you can leave your savings pot alone until you retire.  

While saving for old-age should be high on the list of priorities, the new system allows more flexibility for South Africans to manage their funds. If you’re unsure about what you should be doing with your money, it’s always best to get in touch with a qualified financial advisor. Knowledge is power, after all!