The "two-pot system" for the retirement savings

Under the current legislation taxpayers are allowed to withdraw the full balance of their retirement savings which are subject to tax in terms of the withdrawal tax table. On retirement the cumulative value of previous withdrawals is taken into account in working out the tax they will pay on any cash lump sum taken.

With effect from 1 March 2024, we will see what is called the “two-pot” system being implemented. In terms of this “two-pot” system, all contributions to retirement funds (including preservation funds) from both employee and employer must be allocated to a “savings pot” and a “retirement pot”.

Within the savings pot, taxpayers will be able to save a third of the contributions made to retirement funds in order to have funds for a rainy day. Taxpayers will be able to withdraw from these funds once every 12 months with a minimum withdrawal set to R2 000.

Any amount withdrawn from the savings pot pre-retirement will be subject to tax at the prevailing marginal tax rates. Any amounts remaining in the savings pot on retirement will be tax in terms of the retirement lump sum table.

The remaining two-thirds of a taxpayers contributions made to retirement funds will be allocated to the retirement pot and will only be accessible on retirement. When a taxpayer reaches retirement, the “retirement pot” will naturally be subject to tax in terms of the retirement lump sum table. This effectively results in taxpayers receiving an amount of R550 000 tax free.

In terms of the “two-pot system”, all funds accumulated to a taxpayer before 1st March 2024 will be valued on this date and ring-fenced as vested amounts. These vested amounts will continue to operate under the rules that were in place prior to the changes. Taxpayers will still be able to withdraw funds from the vested amounts, however, such a withdrawal will be subject to tax in terms of the applicable pre-retirement lump sum table.

It is important to note that all retirement funds will remain deductible up to the lower of 27.5% of taxable income or R350,000 per year and taxpayers will not need to re-enrol to a new fund to adapt to the new proposed legislation. Instead, each fund will review its fund rules to accommodate both components in the existing funds.  

The hope was that the “two-pot” system would have been implemented after it was first alluded to in February 2021 by National Treasury. This was not the case and what we have seen is a delay in its implementation due to the administrative burden and the complexity involved with the proposed changes.

Research has shown that more times than not, South Africans do not have sufficient savings. This has created a trend of delaying retirement. Such delayed retirement has forced taxpayers to work past retirement age, with a negative impact on encouraging youth employment.

It appears that the implementation of the two-pot system will be a positive step in encouraging taxpayers to save without having any plans of reinvesting. This will solve a forward-looking issue by obligating taxpayers to save. It does not however provide a solution to the immediate relief needed by taxpayers, especially given the current economic climate.

At this stage, only time will tell if the proposed “two-pot” system will achieve Treasury’s desired outcome.

Authors: 

Lesego Masilo, Junior Tax Consultant

Devs Moodley, Manager - Tax Consulting

23 February 2023