Understanding the retirement fund two-pot system

Come Sunday September 1, the new two-pot system for retirement funds will be implemented.

The aim of this system is to ensure that retirement savings are preserved for retirement until members retire, while also allowing for some flexibility in accessing funds.

It is largely a measure taken by the South African government to prevent a repeat of the situation that arose during the Covid-19 pandemic, when people who were retrenched did not have emergency funds to fall back on.

The new system applies to any South African who has a pension fund, provident fund, retirement annuity or preservation fund and divides members’ benefits into two separate pots – a savings pot and a retirement pot.

Three pots of money

Contrary to its name, there are actually three pots to the new system – a vested pot, savings pot and retirement pot.

Warren Wilkinson, certified financial planner from insurance company Consult by Momentum, explained that after September 1, people will have immediate access to a cash portion of their retirement savings via the savings pot, while preserving the rest for your later years via the retirement pot.

The vested pot is made up of a person’s accumulated retirement funds up to August 31. This money is protected, and the two-pot rules will not apply, says Mr Wilkinson.

On September 1, the fund will make a once-off transfer of 10% of your vested pot or R30 000 (whichever is the lower amount) to your savings pot, which will act as an opening balance.

From September 1 onwards, one-third of members’ retirement contributions will go into their savings pot, which will allow people to access funds in an emergency once every tax year – from March 1 to end of February the following year. People can only withdraw a maximum of R30 000.

If a member does not withdraw during a tax year, their savings pot rolls over to the next tax year, enabling them to accumulate a larger pot before withdrawing. The minimum withdrawal amount is R2000 and is taxed at your marginal income tax rate. You will also pay a processing fee, said Mr Wilkinson.

To put it simply: the retirement pot is locked until retirement, while the savings pot allows withdrawals under certain conditions, giving you the option to access some of your savings before you retire.

And while many are excited about having readily available savings come September 1, people with extensive knowledge of the two-pot system advised retirement fund members to use their savings pots wisely, as you could end up with a small retirement package.

Phil Le Feuvre, South African Reward Association (SARA) member, said the savings pot was created for emergencies, not lifestyle enrichment.

“The more members dig into their savings, the less they will have for retirement in the long run.”

Mr Wilkinson said just because you can dip into your savings pot, doesn’t mean you should.

“If left alone, your savings pot will continue to grow, and help ensure you retire more comfortably.”

Danie Hattingh, principal officer of the Building Industry Bargaining Council Retirement Fund, said while the two-pot system is beneficial in that it will allow individuals to access a portion of their retirement savings during times of financial hardship, accessing even a portion of one’s retirement savings upfront can undermine one’s eventual financial security upon retirement.

You may end up withdrawing everything in your savings pot.

Additional voluntary contributions made to retirement funds will also be transferred into two pots – one-third to the savings pot and two-thirds to the retirement pot.

While the new system will apply to all South Africans – regardless of whether they have a provident fund, pension fund, preservation fund or retirement annuity – an exception was made for provident fund members aged older than 55 years on 1 March 2021. These members can continue under the old system or change to the new one, should they prefer.