The Two-Pot Retirement System, a new development for the retirement industry, represents a significant shift in South Africa’s approach to retirement savings. It aims to ensure that retirement savings are preserved whilst offering members limited access to a portion of their retirement savings before retirement in case of financial hardship.
From 1 September 2024, contributions to the Prescient Umbrella Funds and Prescient Retirement Annuity Fund will be split as follows:
This split excludes transfers from other retirement funds.
If you effect a transfer into any of the Prescient retirement funds from another fund, the money will be invested according to the components you held in the transferring fund.
To make withdrawals possible, the savings component will be seeded for all members (excluding certain provident fund members as set out below) on 1 September 2024, with 10% of the value of your vested component, limited to R30 000. Your vested component is your accumulated retirement interest in the relevant fund as at 31 August 2024 (minus the seed capital) and this portion of your retirement savings remains subject to the rules in place before the Two-Pot Retirement System becomes effective.
If you are a member of our umbrella provident or preservation provident fund and you a) were a member of that fund and b) were 55 or older on 1 March 2021, you will be excluded from the Two-Pot system, unless you decide to opt in. You have until 1 September 2025 to make this opt-in election.
If you decide not to opt in, nothing will change for you and all the rules currently in place for your vested component will continue to apply.
If you choose to opt in to the Two-Pot system, one-third of your contributions from the date of your election to opt in will be allocated to the savings component and two-thirds will be allocated to your retirement component, while your accumulated benefit as at your election date will be your vested component. The seeding amount will be calculated as 10% of your vested value (subject to a maximum of R30 000) as at 31 August 2024 regardless of your opt-in election date.
The benefit statement you receive from 1 September 2024 onwards, will potentially reflect three components:
Only one savings withdrawal can be taken each tax year from the savings component. You need a minimum of R2000 in your savings component to make a withdrawal. If the 10% seed money from your vested component is less than R2000, you will not be eligible to make a withdrawal from your savings component until you have saved more money in your savings component through ongoing or additional contributions.
Your savings withdrawal benefit will be taxed at your marginal tax rate, which means the money is treated as “gross” income and is taxed at the same rate at which your salary is taxed. Important to note is that this is probably a higher tax rate than what applies at retirement to lump sum amounts. No retirement rates, allowable deductions, exemptions or tax-free amounts will be used in the tax calculation. SARS will issue a tax directive in terms of which tax at the marginal tax rate must be deducted, together with any penalties or outstanding tax that may be due to SARS before your savings withdrawal benefit can be paid to you.
This may mean that you do not receive the full savings withdrawal amount that you applied for, as tax at your marginal rate, any outstanding penalties and any outstanding assessments due to SARS, will be deducted first.
Once a tax directive is requested from SARS to process your request for a withdrawal, it cannot be reversed or cancelled if you feel the tax to be deducted is too high. SARS has confirmed that the current tax lump sum calculator on eFiling will be available to individuals and tax practitioners to calculate the estimated tax on a savings withdrawal benefit. While you may make use of this simulation, it may not indicate any penalties or arrear tax that you may owe to SARS. If there are any, these would be included in the tax directive that SARS will then issue once you decide to go ahead with a savings withdrawal and will be deducted from the benefit before it is paid to you.
Taking a savings withdrawal benefit prior to retirement may have a significant impact on your retirement savings in the long-term. By taking these benefits early on in your career, you lose the benefit of compounded growth on your retirement savings.
If you plan to retire at age 60 and decide to take a savings withdrawal benefit of R100 000 at the age of 30, you could lose out on up to R925 000 (total investment growth assumed at a stable 8% per year for 30 years less administration fees) that would have been used to provide you with an income during retirement. That’s a significant difference!
It will be important before any savings withdrawal is considered to think about whether you do in fact need to take it for a financial emergency and whether this will be worth the long-term downside risks to your retirement savings.
On 31 August 2024
Assumptions: Person A has R350 000 accumulated in their Umbrella Provident Fund account as at 31 August 2024.
For illustrative purposes, there is no investment growth, and we ignore all cost implications.
On 1 September 2024
Person A can from 1 September 2024 access any amount from the R30 000 in their savings component (subject to a minimum of R2000). This will be subject to their marginal rate tax (the same rate as their salary is taxed) and they will need to wait until the following tax year starting 1 March 2025 to access their savings component again (which will then be built up by the savings from one-third of all contributions thereafter being allocated to their savings component).
On 31 August 2025
Assuming Person A contributes R9 000 monthly to the fund.
Person A takes their savings withdrawal benefit of the full amount in their savings component of R66 000. It will be taxed at their marginal tax rate, which will depend on their taxable income for the tax year, including the withdrawal amount. Prescient Fund Administration (PFA) the administrator of the retirement fund will apply for a tax directive from SARS and deduct the tax before paying their benefit. Assuming their marginal tax rate is 35%, they will be paid a savings withdrawal of R42 900.
A withdrawal benefit form will be available from Prescient Fund Administration to request a savings withdrawal benefit.
Please note that there may be delays in obtaining tax directives from SARS initially, which may result in withdrawal benefits only being able to be paid out in October 2024.
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