NN 28/2024

The two-pot system: is there reason for panic?

On 21 July, 2024 the State President signed the Pension Funds Amendment Bill into law. This means that the so-called Two-Pot Retirement System is now official. We would like to clarify a few areas of concern raised by members.

What is the Two-Pot Retirement System?

“This dispensation gives members of retirement funds access to retirement savings without having to resign or cash out entire pension funds,” the Presidency said in a statement. In other words, it allows members to make partial withdrawals from their retirement savings before they retire while preserving a portion that can be accessed only on retirement.

The reform will come into effect on 1 September 2024.

Why was the two-pot system introduced?

In many cases, retirement funds are the only savings fund members have. Under the current system, some members resign to access their retirement fund savings to pay off debt, which is detrimental from an economic, financial planning and retirement provision point of view. The two-pot system is meant to support long-term retirement savings, while allowing members access to a portion of their retirement savings should they find themselves in financial distress.

It is advisable that members use the savings component sparingly, and only when there is a dire need.

Will the two-pot system also affect employees of governing bodies and independent schools?

Yes. It will apply to all retirement funds. Therefore if you are contributing to a pension fund other than the GEPF, the system will also apply to you.

How will it work?

When the two-pot system takes effect, three different, so-called components (pots) will be created. They are a savings component (pot), a retirement component (pot) and a vested component (pot).

Your accumulated retirement savings up until 31 August 2024 will be ringfenced in what is called the vested pot. This pot will not receive any further contributions after that date, apart from interest earned. The full value of the vested pot will be paid out to you upon retirement or resignation irrespective of when that may be.

From 1 September 2024, only the savings and retirement pots will receive retirement contributions.  Two thirds of your contributions will go to the retirement pot, while one third will go to the savings pot.  The savings component will be accessible at any time, but withdrawals must be a minimum of R2 000 and only one withdrawal may be made in a tax year.  The amount that is withdrawn will be taxed at the individual’s marginal tax rate.  There is no maximum withdrawal limit on the savings component except for the first year (2024) when it is capped at R30 000 or 10% of the vested pot up to a maximum of R30 000.

I only started contributing to GEPF after 1 September 2024.  Will I also have a vested pot?

No.  Only members who have contributed to GEPF prior to 1 September 2024 will have funds available to be ringfenced in a vested pot.

Can I immediately access my savings pot after 1 September 2024?

No.  The GEPF will communicate the claiming process after the necessary changes to the GEPF rules have been made.

What will be paid out to me upon retirement after 1 September 2024?

Upon retirement, the savings pot which is one third of your retirement fund, will be paid out to you as a lump sum. The remaining two thirds in your retirement pot, will be paid to you as monthly instalments.

Should I resign after 1 September 2024 before my retirement age, what will be paid to me?

You will be paid only the balance of the vested and savings pots as a cash benefit. The balance of the retirement pot will remain within the fund, or it can be transferred to another approved fund, with the restriction that you will only be able to access these amounts once you have reached retirement age.

A lump sum payment will be subject to taxation. If funds are transferred to a retirement fund, the transfer will not be subject to taxation.

Is anyone excluded from the Two-Pot Retirement System?

Yes. Current pensioners are excluded as they have already received their benefits. Members of provident funds who are 55 years of age or older and still employed will not be included, but may exercise a choice whether or not to participate.

SOME GENERAL CONCERNS

Will the implementation of the two-pot system reduce my pensionable service years?

Definitely not. But logically speaking, if you extract monies from your retirement fund prior to retirement, this will necessarily have a negative influence on the actuarial value of the fund.  You cannot lay claim to monies at retirement that you have previously withdrawn.

Each time you access your savings benefit, the amount available to provide you with an income upon retirement, will be reduced.  In addition, the savings withdrawal benefit will be taxed at your marginal rate and has the potential to push you into a higher tax bracket, depending on your income and the value of the withdrawal.

What happens to the monies in my savings pot if I choose not to withdraw from it?

Upon retirement the full value of the savings pot will be paid to you as a lump sum. Tax will be deducted from the lump sum, but it will be according to the retirement lump sum tax table.  Thus, the amount deducted for tax is less than that deducted from any withdrawals.

If I reach retirement age after 1 September 2024 and want to retire, what will be paid out to me?

Your savings pot will be paid to you as a lump sum. The remaining two thirds in your retirement pot will be paid to you in monthly pension payments.  You will have full access to all your pots (vested, savings and retirement) as per the prescribed rules.

What if I get a divorce?

Divorce orders can currently be applied against a member’s retirement savings and this does not change in the two-pot system.  The claim will be effected pro-rata across all the pots.  Spouses can choose to receive their share of all three pots as a lump sum payment, or opt to have it transferred to their respective retirement funds.

What happens should I emigrate?

A member will be able to access the balances in the vested pot and the savings pot on the date of emigration, but Retirement Pot funds will only be accessible after a period of three years following emigration.

Does the two-pot system apply to members currently on pension?

No, their benefits will not be affected.

Members will be kept informed as any new developments unfold. Please do not hesitate to contact your provincial SAOU office for more information.