By: Phil Le Feuvre
THERE is already a lot of confusion about what the two-pot system is and how it will work. Fund members, remuneration practitioners, unions, and other stakeholders are all seeking answers ahead of its implementation on 1 September this year.
Even fund administrators need information – albeit of a more technical nature – to ensure that they and their operations are ready in time.
In this article, we’ll go over the basics and some not-so-basic concepts around the system, starting with why it’s necessary in the first place.
Covid and the 30 years before it
South Africans, whether employees or independent earners, typically contribute part of their monthly salary to one or other retirement fund. When they change jobs or become unemployed, any accumulated savings in their fund are paid out to them after being taxed.
Unfortunately, the temptation to squander this money on luxuries or necessities is too great and it is seldom re-invested towards their inevitable retirement.
This condition was exacerbated by Covid when many lost their jobs and used their payout to survive. Some, still employed but suddenly on lower pay, resigned just to get their hands on more cash.
Yet, this was not the first time the problem was recognised. A method for preserving retirement savings while affording members access to a reasonable portion for emergencies has been debated for the last 30 years or more.
Finally, the two-pot system was developed to offer a rational compromise, although it is not without its challenges.
Introducing the pots
Currently, members have existing savings in their retirement fund from past contributions, called the vested component.
On September 1, 2024, two new components – or “pots” – will be introduced into each member’s fund and all future contributions will be paid into these pots as follows:
The savings pot will receive one-third of the contribution. Members can draw any amount from this pot once a year, provided it is not less than R2 000, and they are limited only by the amount of savings they have at that time.
The retirement pot will receive two-thirds of the contribution. Members cannot withdraw from this pot at all, except as a lump sum when they opt to retire after age 55.
So, for example, for a contribution of R3000 per month, R1000 will go into the savings pot and R2000 will go into the retirement pot.
The seed capital
On 1 September, 10% of the member’s existing savings (vested component), but not more than R30 000, will be transferred to the savings pot as seed capital. This just means funds will be available immediately for members to withdraw. Call it an “introductory offer”.
Of course, the initial withdrawal can only be as much as the member has in their savings pot and can’t be more than R30 000. But there is no cap on future withdrawals and members are not compelled to make a withdrawal in any given year.
Apart from this seed capital, the rest of the vested component will remain untouched and is not part of the two-pot system. If a member leaves their employer, the vested component will be paid out to them, after being taxed. Otherwise, it will form part of their lump sum payout on retirement.
Pots and taxes
Yes, members will be taxed on their withdrawals. But why?
Income that is earmarked as a retirement contribution is not taxed when it is earned but when the lump sum is paid out in the future.
So, when a member withdraws from their savings pot, they are taking untaxed income that will no longer be used for its intended purpose, that is, to fund their retirement. This renders the tax on it due immediately.
While the release of the vested component continues to be taxed against the SA Revenue Service’s severance benefit tax tables, savings pot withdrawals are taxed at the member’s marginal rate.
In South Africa, a taxpayer’s annual salary is split in portions, with each portion being taxed at an increasing percentage. The highest percentage is their marginal rate.
That means a member who withdraws R10 000 at a marginal rate of 31% may be disappointed to find that they lose R3100 to tax, and only get R6900 to spend.
In addition, since their withdrawal relies on a tax directive, they must be compliant with Sars before the funds can be released.
Communication is key
It’s important that fund administrators communicate such technicalities to their members and help them plan their withdrawals around tax and other considerations.
In fact, communication will be vital to ensure the two-pot system rolls out as smoothly as possible and is readily embraced by fund members.
Likewise, members are legally obligated to share their email address and contact number with their administrator to facilitate prompt communication about new requirements.
Refocusing on retirement
While people may be excited at the prospect of readily available cash come 1 September, it’s a good idea to consider the consequences.
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.
It’s also likely that fund administrators will be inundated with applications for withdrawals when the two-pot system is launched. This, along with their own security protocols to limit fraud, could see slow turnaround times that make waiting worth the while.
* Le Feuvre is a South African Reward Association (SARA) member.
PERSONAL FINANCE