South Africa is set to implement major reforms in its retirement framework, offering individuals enhanced options regarding their pension assets. The newly introduced “two-pot” mechanism enables access to a segment of retirement savings prior to the retirement age for those facing financial challenges or personal desires. Starting September 1, contributions to retirement annuity plans will be divided into two distinct “pots.” The first pot will include one-third of the total savings, available for withdrawal before retirement, while the second pot will hold the remaining two-thirds, earmarked for post-retirement access only.
The first pot allows members to withdraw funds once each tax year, although these withdrawals will be taxed. All members of retirement funds will automatically transition into the two-pot framework, excluding legacy retirement annuity members and those with provident or preservation funds who were aged 55 or older as of March 1, 2021. According to the new regulations, 10% of current retirement savings, capped at R30,000, will be allocated to the new savings pot.
Adri Messerschmidt, a senior policy advisor at the association, indicated that this is a one-off measure designed to provide retirement fund members the ability to access some funds in cases of significant financial hardship. However, she cautioned that funds withdrawn from the first pot are classified as income and may be taxed by the South African Revenue Service (SARS). Messerschmidt also alerted members that taxpayers with outstanding debts to SARS, or those facing penalties or interest on unpaid taxes, may have such obligations deducted from their withdrawals, resulting in lower net payouts than anticipated.
Enhanced Flexibility in South African Retirement Saving
She stressed that once a withdrawal request is submitted, the decision is final and cannot be altered, even after reviewing the tax consequences. Additionally, withdrawals from the savings pot might incur administrative fees set by the fund’s management.
To initiate a withdrawal, the savings pot must hold a minimum balance of R2,000, and eligible retirement fund members need to fill out an application form. This process is not automatized, meaning members will not receive an instant deposit into their bank accounts. Richard Carter, head of assurance at Allan Gray, noted that the objective of the system is to enhance retirement results while allowing some access to the savings component in cases of severe financial distress.
Nevertheless, he urged against perceiving it as a disposable fund for daily expenses, as accessing it annually would diminish one-third of the retirement investment. He recommended that maintaining a long-term perspective would lead to better retirement results. Historically, those under financial strain have gone so far as to resign from their jobs to tap into their pension funds, only to later rely on social assistance during their retirement years.
The government has raised the grant for seniors by R100 to a total of R2,180; however, a study conducted by the University of Cape Town indicates that this amount continues to fall short of adequately addressing the needs of this demographic.
