The two-pot retirement system in South Africa, effective from 1 September 2024, aims to balance immediate financial needs with long-term retirement security. Here's a breakdown of what is changing, why it’s being implemented, its impact on you, and what you will experience going forward with an analogy highlighting the importance of planting and looking after your own retirement trees. 

What is changing?

Current structure

Previously, retirement contributions were accumulated in a single pot, accessible only on retirement or in specific circumstances like resignation or retrenchment. This often led to individuals withdrawing their entire retirement savings prematurely to address financial emergencies, jeopardising their long-term financial security.
 

New structure effective from 1 September 2024

Retirement contributions will be split into 2 overall pots:

1. Savings pot: Accessible for emergencies or short-term needs.
2. Retirement pot: Reserved only for retirement and can only be used to purchase annuities.
    

Three-pot system transition

Members who have been part of retirement funds before 1 September 2024 will initially have 3 pots:

1. Vested component: Contributions and returns accrued before the new system.
2. Savings component: New accessible savings.
3. Retirement component: New long-term savings.

Understanding the analogy: Your retirement savings as a tree

Imagine your retirement savings as a tree, which requires careful management to grow and produce benefits like fruit and shade.
 

1. Immediate access: The savings pot is like the fruit you can pick from your tree whenever needed. It provides for your current needs, just like fresh fruit. However, if you eat fruit today from a tree and do not take measures to ensure future growth, such as replanting or nurturing the existing tree, you will have less fruit in future for your retirement.
   
   
2. Long-term security: The retirement pot is the tree itself. While you may pick fruit now, the real value is in the tree’s ability to produce fruit year after year. By nurturing the tree (saving for retirement), you ensure a continuous and sustainable supply of fruit (retirement funds) in the future.

Why the change?

• Accessibility: To allow members to access a portion of their retirement savings while still employed for an emergency or during times of hardship (as many experienced during Covid-19).
  
  
• Preservation: To ensure that a significant portion of retirement savings is preserved until retirement, promoting financial security for later years.

What is the impact on you?

1. Immediate access: You can withdraw from the savings pot for emergencies, subject to certain conditions and tax implications.
   
   
2. Long-term security: The retirement pot ensures you have money available for retirement, which can be used only to buy annuities.
   
   
3. Tax implications: Withdrawals from the savings pot are taxed at your marginal rate, while the retirement pot remains untaxed until retirement.

What will you see and experience going forward?

1. Statements: Your retirement fund statements will reflect the split into the savings and retirement pots, along with the vested component, if applicable.
   
   
2. Decision-making: You'll have more flexibility with your savings but must plan withdrawals carefully to avoid excessive taxes and ensure sufficient retirement funds.
   
   
3. Advice: Consulting financial advisers will be crucial to managing your money effectively (and ensuring you achieve your retirement goals), especially regarding the tax-free transfers and optimal use of both pots.

Key terms explained

• Vested component: The accumulated savings and returns before the new system, taxed in line with old rules.
• Savings pot: One-third of new contributions, accessible before retirement for emergencies.
• Retirement pot: Two-thirds of new contributions, locked until retirement for buying annuities.
• Annuities: Financial products that provide a steady income stream during retirement.
• Retirement savings: Vested component, savings pot and retirement pot.

Treating your retirement savings as a tree lets you visualise the importance of nurturing your investments today to ensure a bountiful and secure future. Avoid the temptation to pick the fruit now; instead, invest in growing more trees for a sustainable retirement.

Want to know more about how the changes affect you? 

• Contact your wealth manager.
• If you’re not a client yet and want to learn more about how we can help you, we would love to hear from you. Call us on 0860 111 263 or complete an online contact form. 

Legal Line/Disclaimer
This information is for general information purposes only and is not legal advice.