In our continuous effort to keep you informed about important changes that may affect your tax and financial planning, we’re introducing you to a significant update to South Africa’s retirement savings landscape: the Two-Pot System.
This new approach, set to take effect from 1 September 2024 (subject to pending legislative amendments), aims to provide a balanced solution to accessing your retirement funds, ensuring financial relief today without compromising your financial security tomorrow. A portion of your retirement savings will be locked away until retirement, while only the portion that enters the “Savings” pot will be accessible pre-retirement.
What is the Two-Pot System?
The Two-Pot System is a new policy designed to enhance how we save for retirement, and, how we access these funds, both pre and post-retirement. It divides your retirement contributions into two distinct “pots”:
- The Retirement Component (about 67%)
This part of your contribution is locked away for your retirement, ensuring you have a stable income when you retire.
- The Savings Component (about 33%)
This portion offers you flexibility, allowing for withdrawals in times of financial need without having to leave your job or retire. Any withdrawals will attract tax exposure at your marginal tax rate.
How Does It Affect You?
- More Control Over Your Savings: You can now access part of your savings in emergencies without tapping into the funds reserved for your retirement.
- Enhanced Financial Security: By preserving a larger portion of your contributions for retirement, you’re likely to enjoy a more comfortable lifestyle in your golden years.
- Tax Implications: Withdrawals from the savings component will be subject to tax at marginal rates, promoting responsible use of this flexibility.
Transition to the Two-Pot System: What Happens to Existing Contributions?
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As we transition to the new Two-Pot System, your existing retirement savings will be carefully segmented to respect your past contributions:
- Vested Component: Your contributions up until 31 August 2024 will form a “vested” component. This preserves the value you’ve already built under the rules that apply until the transition date.
- Savings Component Boost: Starting 1 September 2024, one-third of any new contributions will go into your savings component, which will receive a one-time boost from your vested component (minimum of 10% of your fund value as of 31 August 2024, up to R30,000).
- Retirement Component: The remaining two-thirds of new contributions will be allocated to your retirement component, growing your retirement value securely until retirement.
This structured approach ensures a smooth transition to the Two-Pot System, safeguarding your existing savings while aligning future contributions with the proposed changes.
Why This Change?
The introduction of the Two-Pot System comes in response to the financial strains many faced during the COVID-19 pandemic, highlighting the need for more accessible retirement savings in times of crisis. It also aims to address the concern that most individuals deplete their retirement savings severely and prematurely, often due to changing jobs.
Key Dates to Remember
- Effective Date: 1 September 2024 (subject to pending legislative amendments)
- Before this date, current rules apply, and you should consider how these changes might impact your financial planning.
Next Steps
As we approach the implementation of the Two-Pot System, we’ll provide you with all the necessary information and guidance to navigate this change confidently. Whether it’s deciding how much to contribute or understanding the tax implications, we’re here to help.
Simply drop us an email on team@accounting4.co.za or call at us your convenience to speak to our friendly staff on 081 324 4222 / 031 701 9722.
Your Financial Security is Our Priority
At Accounting 4 Associates, we’re committed to ensuring you’re well-prepared for this transition. We understand that changes, especially those that impact retirement planning, can bring questions and, sometimes, concerns. Rest assured, we are here to navigate these changes with you, every step of the way. We welcome any questions you may have about the Two-Pot System or any other financial concerns. If you need expert advice from investment planning professionals, we can point you in the right direction.
Stay tuned for further updates, and as always, feel free to reach out to us for personalised advice and support.
