South Africa’s Innovative Two-Pot Retirement System: What You Need to Know

South Africa is set to introduce a new “two-pot” retirement system, which legal experts Robert Driman and Armand Swart from Werksmans Attorneys suggest will offer South Africans the best of both worlds. This system aims to provide individuals with early access to a portion of their retirement funds while still preserving a significant amount for their retirement.

1. South Africa is introducing a new “two-pot” retirement system, providing early access to a portion of retirement funds while preserving a significant amount for later use.
2. The system, scheduled to take effect in March 2024, comprises a “savings pot” for withdrawals and a “retirement pot” for securing long-term savings in pension funds, provident funds, and retirement annuity funds.
3. The two-pot system aims to address financial distress among fund members and provide flexibility, although it may impose additional administrative burdens and costs on funds and industry stakeholders.

The new retirement system is scheduled to take effect from March 2024. However, the absence of additional draft legislation in February has raised concerns that industry stakeholders may not have sufficient time to implement the necessary changes before the deadline.

Driman and Swart have provided an in-depth analysis of the proposed system and its current status to help South Africans better understand the implications of these changes.

The Two-Pot System Explained

In 2022, South African Minister of Finance, Enoch Godongwana, introduced the draft revenue laws amendment bill. This proposed legislation aims to replace the existing one-pot retirement system with a more innovative two-pot system, affecting pension funds, pension preservation funds, provident funds, provident preservation funds, and retirement annuity funds (collectively referred to as the Funds).

Under this new system, a “savings pot” and a “retirement pot” will be established. Fund members will be able to withdraw from their savings pots, while funds in the retirement pot will remain untouched.

Treatment of Existing Savings

Upon the implementation of the two-pot system, existing retirement funds will be transferred to a “vested pot.” These funds will still be subject to the current laws, and no further contributions can be made to the vested pot following the introduction of the new system. However, provident fund members who were 55 years old or older on March 1, 2021, will be exempt from this change as their pension benefit regime will remain the same.

Contribution Allocation

The savings pot will receive no more than one-third of a fund member’s retirement contributions. The remaining two-thirds or more of the contributions will be allocated to the retirement pot.

Withdrawal Rules

Fund members will be permitted to withdraw from their savings pots once every 12-month period, with a minimum value of R2,000. No withdrawals will be allowed from the retirement pot. Upon retirement, the money available in the savings pot will be paid out in a lump sum, while the funds in the retirement pot must be used to purchase a retirement annuity, subject to the minimum threshold amount required to obtain an annuity.

Advantages of the Two-Pot System

The current system only allows fund members to access their pension funds or provident funds upon retirement or resignation from their employment. The National Treasury highlighted several reasons for introducing the two-pot system:

1. Fund members may require access to their funds for specific needs, and under the existing system, they can only access these funds by resigning, thereby jeopardizing their long-term savings.
2. The current system fails to address the financial distress experienced by many fund members who cannot access their assets in investment funds.
3. The Covid-19 lockdowns exposed the shortcomings of the current system, as many fund members faced financial distress but could not access their retirement funds without resigning or engaging in other dubious practices, such as divorce.

The two-pot system offers a lifeline to fund members facing financial difficulties while ensuring that the majority of their retirement savings remain intact, according to Werksmans Attorneys.

Potential Challenges

While the new system is expected to benefit fund members, it will also place additional administrative burdens on the Funds. They will need to amend their rules, implement new complex systems, train employees, and educate fund members. The new system will also necessitate direct engagement