Today’s article is an extract from Chapter 10 of the book, “Pensions for Palookas 2024,” by Advocate Brett Ladouce which will be published in October, 2024.
The Two Pot System, which will come into effect on September 1, 2024, will regulate access to retirement savings before the date of retirement.
Before September 1, fund members had no access to their retirement savings while they were still active members of the fund, but they had access to all their retirement savings as a withdrawal benefit when they resigned or got retrenched, and withdrew from the fund before their normal date of retirement.
In terms of the Two-Pot System, members have limited access to their retirement savings while they are still active members of the fund, as well as limited access to withdrawal benefits before the date of retirement if they should decide to leave the fund before their retirement date.
Three investment pots will be created on September 1, namely a vested pot; a retirement pot; and a savings pot.
The vested pot consists of all contributions (and investment growth) that accumulated in the retirement fund up to August 31. The current retirement fund regime will remain applicable to this pot. Members will have access to the full value of the vested pot as a lump sum withdrawal benefit when they exit the fund before retirement. Lump sum withdrawal benefits payable due to resignation will be taxed according to the withdrawal tax table, and those payable due to retrenchment will be taxed according to the retirement tax table that is applicable on the date of withdrawal.
The retirement pot consists of two-thirds of all fund contributions (and growth thereon) accumulated in the fund as of September 1. Members will not be able to access money in this pot before the date of retirement where they exit the fund before their retirement date. At retirement, money in this pot must be used to buy an annuity. Where the sum of the retirement pot and two-thirds of the vested pot is less than R165 000 on the date of retirement, the full amount can be taken as a lump sum cash benefit.
The savings pot consists of one-third of all fund contributions (and growth thereon) accumulated as of September 1. Money in this pot will be accessible during fund membership. Once-off seeding (transfer) of up to 10% of the vested pot to the savings pot (limited to R30 000) took place on September 1 to fund this pot, and make a withdrawal from this pot possible to members as of September 1. Only one withdrawal of at least R2 000 (up to full value in the pot) per annum will be allowed from this pot.
All withdrawals made from this pot by active members will be taxed at their marginal tax rate as it will be added to the member’s taxable income for the tax year in which the withdrawal is made. At the death or retirement of a member, the money in this pot can be taken in cash or transferred to the retirement pot. The lump sum cash death or retirement benefit from this pot will be taxed according to the lump sum retirement benefit tax scale.
Provident fund members who were 55 years of age or older on March 1, 2021 have the option to keep all their retirement benefits and new contributions after September 1, in the vested pot or to create additional savings and retirement pots for contributions made as of September 1.
The proposed new system has benefits as well as unintended consequences. From a saving for retirement viewpoint, it forces members to retain the bulk (at least two-thirds) of their retirement savings made from September 1 for retirement by granting them no access to the retirement pot before their date of retirement, and therefore ensuring that this money is available at retirement to provide an income stream for fund members once they retire.
From an emergency fund perspective, active fund members who have not created emergency savings funds can now use the savings pot as emergency funds to fund unexpected expenses, for example, medical expenses not covered by their medical schemes. It does however also create the possibility of active fund members using the after-tax money withdrawn from the savings pot for non-essential expenses such as holidays or the purchase of luxury items.
The limitation of access to withdrawal benefits removes the possibility of members who have a high-interest debt to improve their overall financial situation by using withdrawal benefits to pay off debt and using the money saved on debt repayments as extra contributions to their retirement funds, as the average annual rate of return on the retirement savings will in all probability be less than the average annual interest rate paid on unsecured debt. Fund members will therefore have more savings for retirement, but less net assets at retirement due to the money “lost” in terms of interest paid on high-interest debt.
Special Offer for Personal Finance Readers: You can now pre-order your signed copy of “Pensions for Palookas 2024” for R250 per copy (Published Price is R350) by sending an email to pensionsforpalookas@gmail.com. All pre-orders that are paid on the shipping date will qualify for the Two-Pot lucky draw where you will stand a chance of winning two Le Creuset pots.
PERSONAL FINANCE