The two-pot retirement system was introduced on the 1st September 2024. The system allows employees to access certain funds from their retirement fund before retirement if they need to, and without needing to resign and leave their jobs. It tries to create a balance between a person’s immediate financial needs and long-term retirement savings. All retirement contributions made by employees after the 1st September 2024 will be split with one-third of contributions going to a ‘savings pot’ and two-thirds going to a ‘retirement pot.’ Under this Two-Pot system, employees can access funds accumulated in their ‘savings pot’ before retirement, but the funds in the ‘retirement pot’ will continue to remain untouched until retirement. The employee will not be able to access these funds before they retire from their job.

What was the problem with the old pension provisions?

Before the introduction of the new ‘two-pot’ system, the rules on retirement meant that your contributions to a retirement fund would be ‘locked in’ until you reached the retirement age (typically 55 years), except if you died or were permanently disabled before this age, or if you resigned from your job. The result of this was that many employees chose to resign from their jobs so that they could have immediate access to their retirement savings. This meant there would be no ‘retirement benefits,’ or limited retirement benefits remaining when they finally retired.

The two-pot system aims to help South Africans manage their finances and give them some flexibility with the money they have saved for retirement. It allows them to withdraw a certain amount every year for emergencies while at the same time protecting most of the savings for retirement. It also protects people by preventing them from cashing out their full pension savings when they change jobs leaving nothing for retirement.

How does the Two-Pot Retirement System work?

The system means that from 1 September 2024 any new retirement contributions that you make into your retirement fund will be split into two pots: a savings pot and a retirement pot. One-third of your pension contributions go into the savings pot and two-thirds go into the retirement pot. All your existing retirement savings up to 31 August 2024 will be kept in a vested pot.

The savings pot

One-third of your pension contributions from 1 September 2024 will go into your savings pot. In addition, a once-off amount of 10% of your savings up to 31 August 2024 (which is kept in your vested pot) will be paid to your savings pot to create an opening balance that you can draw from.

The system allows you to withdraw cash from your savings pot once a year. The minimum withdrawal amount is R 2 000. Withdrawals from the savings pot will be included in your gross income and will be taxed with your PAYE tax deductions.

The importance of the savings pot is that you will be able to access funds in your savings pot before retirement and without needing to resign from your job.

Any withdrawals from your savings pot are taxed at your personal tax rate and you will also pay a transaction fee. If you owe SARS any money, this will automatically be deducted before you receive funds.

The retirement pot

Two-thirds of your pension contributions from 1 September 2024 will go into your retirement pot. This amount remains ‘locked in’ and saved ntil you retire. When you retire, under the two-pot retirement system, you can withdraw one-third of your retirement pot, and the remaining balance will be paid as fixed monthly payments.

This system aims to balance immediate financial needs with long-term financial security and protecting retirement savings.

To summarise: you will be able to use your savings pot before retirement as a ‘rainy day’ fund, but you will only be able to access the retirement pot when you retire.

The vested pot

All your existing retirement savings up to 31 August 2024 will be kept in a vested pot. You cannot make any additional contributions to the vested pot unless you were contributing to a retirement fund and you were 55 years old on 1 March 2021.

Ten percent (up to a maximum of R30 000) of your existing savings in the vested pot will be moved into your savings pot (if you have retirement savings) as a once-off opening balance. For example, if you have R 200,000 in your vested pot, 10% (or R20,000) will be moved into the savings pot to create a once-off opening balance. The vested pot then reduces to R 180 000 but you can use the R20 000 in the savings pot for emergency drawdowns according to the two-pot rules.

You will not be able to withdraw from the vested pot until you retire (or if you die or are permanently disabled before retirement age, or if you resign from your job). However, when you retire you can withdraw the full amount (or whatever the rules of your pension fund state). In other words, the same rules that applied to your retirement fund before the two-pot system was introduced will continue to apply to funds in the vested pot.

NOTE: If you retire and the total amount of your vested pot and retirement pot is less than R 165 000, you will be able to withdraw the full amount from both pots.