Two-pot system will spark major changes
• Members may need financial education and support to navigate options
Resigning to get access to your retirement savings is a thing of the past. The two-pot retirement system, which is expected to come into effect on September 1 2024, will bring about major changes to the retirement landscape and the rules governing retirement funds.
Under the current retirement fund rules, when a member of a pension or provident fund resigns from their employer, the member can opt to preserve their retirement savings in the employer fund as a paid-up member or in a preservation fund of their choice. Alternatively, the member can cash out the full value in the fund. Should a member choose to cash out the funds, the withdrawal is taxed according to the withdrawal tax table with the first R27,500 being taxed at 0%.
INSUFFICIENT SAVINGS
Historically, explains Palesa Mokoena, Technical Support Specialist at Glacier by Sanlam, many members have chosen to withdraw from their funds on resignation, with some even choosing to resign from their jobs just to access their savings in a provident or pension fund in times of hardship.
“These trends have contributed to the insufficient levels of retirement savings among the majority of South
Africans at retirement. As a result, government has proposed the two-pot system which is aimed at addressing the issue of members depleting their retirement savings before retirement; providing members limited access to retirement savings before retirement without needing to resign; and encouraging long-term preservation,” she says.
Under the new system, the member’s options at resignation will change. From September 1 2024, pension and provident members who resign from their employer will still be allowed to take the full value of their vested component, defined as retirement savings accumulated on August 31 2024, and any future growth of this component of their retirement savings.
Mokoena says that at resignation, members will only be allowed to withdraw the value of their savings component — one-third of contributions from September 1 2024 — if they have not already made a withdrawal from this component in the tax year or if the remaining value of this component is less than R2,000.
“Importantly, these members will not be able to withdraw any retirement savings that are in their retirement component at the time of resignation, as this component must be preserved until retirement. This means that going forward, members will no longer be able to cash out 100% of their pension or provident fund savings at resignation.”
Any resignation withdrawal from the vested component, she adds, will be taxed according to the withdrawal tax table, whereas any resignation withdrawal from the savings component will be taxed at the member’s marginal income tax rate.
When a member resigns, members may be permitted to stay in the employer fund as a paid-up member and retain the remaining retirement component with the employer pension or provident fund until retirement, subject to fund rules, says Mokoena.
Alternatively, a member can transfer their retirement component tax free to a preservation fund of their choice.
“The member will not be allowed to make a withdrawal from the retirement component even if they transfer it to a preservation fund,” she explains. “This is because the retirement interest in the retirement component will only be accessible at retirement or on emigration and three years after cessation of tax residency, disability or death.”
On retirement, she adds, the member will not be allowed to take a portion of the remaining retirement component in cash but will instead have to purchase a compulsory annuity with the full value of the retirement component, unless the value falls below the legislated limit.
TAX TABLES
Says Mokoena: “A withdrawal from the vested component will be taken into consideration when calculating the tax on future retirement cash lump sums, as the retirement fund lump sum tax tables are subject to the principle of aggregation.
“Any annual withdrawal or resignation withdrawal made from the savings component will be taxed in that tax year at marginal tax rates; however, these withdrawals will not be considered for the principle of aggregation with regard to future retirement cash lump sums.”
The new system represents a significant change for members of pension and provident funds who have become accustomed to the current system which allows for full withdrawals each time they change jobs or leave their employer.
“The challenge is that many members are not familiar with the concept of preservation and the workings of preservation funds,” says Mokoena. “On resignation, members will require financial education and support from their employers, funds and financial advisers to navigate their options under the two-pot retirement system.”
GOING FORWARD, MEMBERS WILL NO LONGER BE ABLE TO CASH OUT 100% OF THEIR PENSION OR PROVIDENT FUND SAVINGS AT RESIGNATION