With effect from June 1, 2025, the South African pension system will undergo substantial changes affecting how people deal with retirement savings either daily or by direct access. With these amendments, fund members should be allowed greater flexibility while preserving funds for retirement from the actual perspective.
The Two-Pot Retirement System Is Laid Down
Implementation of the “two-pot” retirement system forms the core of the new pension legislation. Retirement contributions under this system would be split into two categories
- Savings Component: One-third of all retirement contributions made after the implementation date shall be allocated to this component. The member is allowed one withdrawal from this pot per tax year, with a minimum withdrawal amount of R2,000. Applicable taxes for withdrawals shall be at the individual’s marginal tax rate.
- Retirement Component: The other two-thirds of contributions will go to this component. The funds in the retirement component are preserved until retirement and must be used to purchase a pension-providing product at retirement.
Treatment of Existing Retirement Savings
Retirement savings accumulated prior to the date of implementation shall be placed in the “vested component.” Members can transfer a maximum of 10% of the vested savings, capped at R30,000, into the new savings component. This would, thus, allow immediate access for part of the existing funds in the new system.
Eligibility and Exemptions
The new design of the two-pot system applies to most active members of pension, provident, preservation, and retirement annuity funds. However, there will be certain exceptions:
- Members of provident funds who were 55 years or older on 1 March 2021 and have remained in that fund, unless they elect to join the new system.
- Members of legacy retirement annuity policies and funds with no active members, for example those in liquidation or dormant funds.
Administrative Considerations
While the new rules commence from 1 June 2025, withdrawal requests may be delayed while pension funds update their administrative systems to effect the new requirements. Members are advised to check with their funds for specific timelines and procedures.
Conclusion
The two-pot retirement system will cause a substantial deviation in the generation of retirement savings in South Africa and would provide members with some degree of access to their funds in times of need, while augmenting their long-term financial security. Fund members are encouraged to assimilate the changes as the rules come into force and plan accordingly.