Understanding South Africa’s Two-Pot Retirement System

As of 1 September 2024, South Africa implemented the long-anticipated two-pot retirement system, changing how millions manage their retirement savings. This reform aims to strike a balance between providing short-term financial relief and preserving long-term retirement security. This system presents both a challenge and an opportunity: to guide clients through new rules while helping them protect their financial futures.

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Why the Two-Pot System Was Introduced

Previously, many South Africans cashed out their full retirement savings when changing jobs, often depleting funds meant for old age. With only 6% of the population retiring comfortably, the government sought a solution. The two-pot system enforces better saving habits by splitting contributions into accessible and preserved portions.

At Masthead’s Cape Town MasterClass, Lizl Budhram, Head of Advice at Old Mutual Personal Finance, said it best: “After 25 years, we’ve seen little improvement in retirement outcomes. The two-pot system gives us legislative backing to help drive meaningful change.”

How the Two-Pot System Works

Under the new model, all retirement contributions are split into three pots:

1. Savings Pot (Access Pot):
   • Receives one-third of all new contributions.
   • Members can withdraw from it once per tax year, with a minimum withdrawal of R2,000.
   • On 1 September 2024, each fund seeded this pot with 10% or R30,000 (whichever was lower) from the member’s vested pot.
2. Retirement Pot (Preservation Pot):
   • Receives two-thirds of new contributions.
   • Cannot be accessed before retirement, promoting long-term savings discipline.
3. Vested Pot:
   • Contains contributions made before 1 September 2024.
   • Remains governed by old rules.
   • Up to 10% (capped at R30,000) was transferred to seed the savings pot.

Example: If a client contributes R6,000 per month, R2,000 goes to the savings pot, and R4,000 to the retirement pot.

This structure allows clients to access funds during emergencies without jeopardizing their retirement.

Why Financial Advisors Matter More Than Ever

The system’s rollout has already made waves. SARS reported R4.1 billion in savings pot withdrawals in its first month. Discovery also noted that 22% of eligible members accessed their savings pots in September. These statistics reveal a need for careful financial advice.

Financial advisors must step in to help clients weigh short-term relief against long-term consequences.

Key Responsibilities for Financial Advisors

1. Master the Rules:
   Stay up to date. Advisors must document their training and have processes in place to handle withdrawal requests professionally.
2. Manage Client Expectations:
   Explain processing delays due to high withdrawal volumes and ensure full FICA compliance when verifying clients.
3. Communicate Tax Implications Clearly:
   Withdrawals are taxed as part of the client’s income. This can push clients into higher tax brackets, unexpectedly reducing their net withdrawal.
4. Disclose Withdrawal Fees and Limits:
   Let clients know about administrative fees and the annual withdrawal cap. Also clarify that withdrawn amounts can’t simply be “repaid.” A R9,000 withdrawal would require a future R27,000 contribution to “restore” it (due to the 1:2 split between the savings and retirement pots).
5. Address Impact on Long-Term Goals:
   Early withdrawals lower potential investment growth. Explain how this affects projected retirement age, income, and the power of compound interest.
6. Promote Emergency Fund Alternatives:
   Encourage clients to build separate savings for emergencies to reduce reliance on the savings pot.
7. Correct Myths and Misconceptions:
   Misinformation is common. Use your role to deliver clear, verified information. Provide written communication to clarify fees, rules, and available tools.
8. Use Annual Reviews Strategically:
   Incorporate retirement pot status in every client review. Use it to update financial plans and document discussions about potential withdrawals. This protects both the advisor and client in case of future disputes.

Navigating the New Retirement Landscape

The two-pot system empowers South Africans to handle short-term financial needs without sacrificing their retirement goals. But this balance requires active and informed decision-making, and that’s where financial advisors play a crucial role.

By providing clear guidance, staying informed, and helping clients weigh both immediate and long-term outcomes, advisors can help secure better futures for South Africans.