Last month, President Cyril Ramaphosa enacted the Revenue Laws Amendment Bill of 2023, introducing a new ‘two-pot’ system for retirement funds, effective from 1 September 2024, Cape {town} Etc reports.
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This system aims to enhance the accessibility and preservation of retirement savings by dividing contributions into two separate components: a savings pot and a retirement pot.
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System breakdown:
- Savings Pot: One-third of contributions will be allocated to this component, which can be accessed in cases of financial hardship before retirement.
- Retirement Pot: The remaining two-thirds will be designated for retirement and can only be accessed upon retirement. This portion must be used to purchase a pension product. Existing retirement savings are protected, with no changes to the rules governing pre-implementation funds.
Individuals aged 55 or older as of March 2021 will remain under the old system unless they opt into the new one.
After 1 September 2024, members will have the option to withdraw a small portion of their existing savings, known as ‘seed capital,’ though only those with more than R2 000 in their savings pot will be eligible for immediate claims.
Early withdrawals from the savings pot will be taxed according to marginal tax rates, which can be significant. For instance, if Mpho, earning R250 000 annually, withdraws R4 000, he faces a 26% tax rate and processing fees. Conversely, Thandi, with an income of R675 000, will incur a 39% tax rate on a R16 000 withdrawal, in addition to processing fees and any outstanding taxes.
Administrative fees will vary, and some withdrawals may be restricted due to existing debts or legal obligations.
Alexforbes’ Vickie Lange highlights that while the new system offers a balance between short-term financial relief and long-term security, it is crucial for members to understand the tax implications and potential fees associated with early withdrawals.
‘It is likely that the two-pot retirement system will improve new members’ retirement outcomes by 2 to 2.5 times compared to those under the current system, given the requirement to preserve their retirement pots fully before retirement.
‘This change is important because the main reason for members not being able to afford to retire is because only 1 in 10 members preserve their retirement savings when changing jobs,’ Lange indicated.
She advises that withdrawing from the savings pot should be a last resort, suggesting that maintaining a separate emergency fund may be a more prudent approach.
Old Mutual’s Michelle Acton emphasises the need for retirement funds and administrators to prepare adequately for the new system, including setting up accurate seeding calculations for existing savings.
The two-pot system is designed to encourage better retirement outcomes by ensuring that a significant portion of funds remains intact until retirement. While it provides more flexibility for emergencies, members should carefully assess their financial needs and the potential impact on their retirement savings before making withdrawals.
Marginal tax rates for the tax year ending 28 February 2025:
18% | for taxable income below R237 100 |
26% | for taxable income above R237 100 |
31% | for taxable income above R370 500 |
36% | for taxable income above R512 800 |
39% | for taxable income above R673 000 |
41% | for taxable income above R857 900 |
45% | for taxable income above R1 817 000 |
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