New Two-Pot Retirement System: What you need to know

South Africa is set to implement the much-anticipated two-pot retirement system from September 1, 2024. This significant change allows members partial access to their retirement savings, aiming to offer financial relief without compromising long-term security. But what does it all mean? As we approach this pivotal transition, accountants must be on board understanding the essential aspects and implications of the new system.

What is the Two-Pot Retirement System?

The two-pot retirement system in South Africa divides retirement contributions into two parts: one-third into the "accessible pot" and two-thirds into a "savings pot." One-third of any new contributions go into the accessible pot, from which members can make limited withdrawals before retirement, addressing short-term financial needs while still aiming to mitigate long-term impacts. The remaining two-thirds go into the savings pot, which is preserved until retirement to ensure financial security in the members' later years. This structure is designed to balance immediate financial access with the goal of long-term savings accumulation.

Source: National Treasury 2024 Two-Pot System - FAQ.pdf

Key Highlights of the Two-Pot System:

1. Access and Limitations: Members can withdraw up to 10% of their retirement savings, capped at R30,000 from the accessible pot. This structure aims to strike a balance between immediate financial needs and long-term retirement security.

2. Understanding Transactional Costs: Be mindful of deductions such as administration fees and taxes when withdrawing from the accessible pot. These deductions will reduce the net amount received and it is important to consult with the fund for precise calculations.

3. Timeline and Process for Withdrawals: While the system suggests easier access to funds, actual withdrawal processes may be delayed by fraud prevention measures and administrative protocols. Members should set realistic expectations for accessing funds and engage directly with their retirement funds to ensure security and compliance.

4. Fraud Prevention and Data Security: With the ease of direct withdrawals, there is an increased risk of fraud. Members must diligently update and secure their personal information and follow their fund’s specific claims procedures to protect their interests.

5. Tax Implications: Every withdrawal made from a savings component is added to the member’s taxable income and will be taxed at a fixed marginal tax rate at the time of withdrawal.

6. Implications for Future Savings: Withdrawing from the accessible pot will reduce the funds available for growth. Members should carefully consider how withdrawals affect their long-term retirement goals and annuity potential.

Source: National Treasury 2024 Two-Pot System - FAQ.pdf

What should accountants do?

Accountants have new responsibilities in advising their clients effectively. Here are the key steps they should take:

• Educate Clients: Accountants need to clearly explain the new system, focusing on the division of contributions into the accessible savings pots, and the implications for both short-term accessibility and long-term savings. Refer to our handy template letter you can amend and send to your clients.

• Update Financial Plans: Review and adjust clients' financial and retirement plans to account for the potential impacts of withdrawals from the accessible pot.

• Tax Planning: Assist clients in understanding and planning the tax implications of making withdrawals from the accessible pot.

• Ensure Compliance: Stay updated with regulatory changes to ensure that clients' retirement planning complies with the new system's rules.

• Monitor Impacts: Help clients monitor the impact of withdrawals on their overall retirement goals and adjust strategies as needed.

Conclusion

As the implementation of the two-pot retirement system nears, understanding the processes and implications of withdrawals is crucial. This system offers members partial access to retirement funds, a welcome change, yet comes with significant responsibilities and considerations.

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Use CIBA’s template letter to inform your clients