A financial expert explains how the two-pot retirement system works
Wayne Paries, a certified financial planner of SWI, explains how the two-pot retirement legislation affects those who want to take early retirement or are retrenched.
In February, the Minister of Finance, Enoch Godongwane, made the two-pot retirement legislation official.
He announced that from 1 September 2024, South African workers who contribute to a retirement fund will be able to withdraw a portion of their retirement savings.
"Progress has been made on the two-pot retirement system since I last addressed you during the Medium Term Budget Policy Statement. From 1 September 2024, the first cash withdrawals could be made from the savings pot,” he said during his budget vote speech delivered to a joint sitting of the National Assembly (NA) and National Council of Provinces at the Cape Town City Hall.
READ: How to search if you are a beneficiary of an unclaimed pension
You can withdraw a minimum of R2,000 (before fees and taxes) once a tax year even if you are still with your employer, however, you will pay tax and a processing fee.
Your retirement savings will be divided into 3 components - a vested, savings, and retirement component.
The two-pot rule will only apply to your savings and retirement components from 1 September.
The vested component is protected - everything before September, you will still have vested rights to it.
"Whatever you accumulate after the law comes in will fall under the two pots. Whatever you accumulated before the law comes in will still pay out in terms of old rules," says Wayne Paries, a Certified Financial Planner at SWI Financial Consultants.
He explains that if you resign at a later stage after the law kicks in, you can still get paid out what you had accumulated before 1 September 2024, "as you would have had the law not come in".
Only what you start to accumulate after the law kicks in will fall under the two-pot system.
This means if you leave your employer on resignation, dismissal, retrenchment etc., your rights and options will remain the same for the vested component.
All contributions after the law kicks in will be paid into your savings and retirement components.
Paries explains that "early retirement starts at age 55" and if you decide to retire before then, "your benefit would be processed as withdraw benefit".
He says the disadvantage with this is that you would pay a higher level of tax.
"If you resign, the retirement pot cannot be accessed until you retire. Let’s say you are 35 and you resign, only the vested pot and savings pot will be paid, that retirement pot cannot be accessed”.," says Wayne.
The financial advisor says it is also important to consider tax.
"One would also need to consider the amount of tax that will be deducted when taking money out of a Retirement Fund. There is a higher rate of tax payable when one resigns compares to when one retires."
Read more about the 'two-pot' retirement rules - New 'two-pot' retirement rules will allow one withdrawal per year from your pension.
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