Understanding the Two-Pot Retirement System and Tax

The Two-Pot Retirement System and tax

The new Two-Pot Retirement System, effective from 1 September 2024 in South Africa, changes how retirement savings are managed. Under this system, retirement contributions will be split into two parts:

  1. Retirement Pot: Two-thirds of contributions will be allocated here and can only be accessed upon retirement.

  2. Savings Pot: One-third of contributions will go into this pot, which can be accessed once per tax year before retirement for emergencies.

Withdrawals from the Savings Pot are considered income and are taxed at the individual's marginal tax rate. Additionally, any outstanding taxes owed to the South African Revenue Service (SARS) can be deducted from these withdrawals.

Frequent withdrawals from the Savings Pot could reduce overall retirement savings, potentially compromising financial security during retirement. It is advised to consider the tax implications and long-term impact before making withdrawals.

Starting 1 September 2024, your total retirement savings will consist of the following pots

VESTED POT

Your retirement savings up to September 1, 2024, will be placed in the Vested Pot, following the existing rules. No additional contributions will be added to this pot after August 31, 2024.

If you are in an occupational fund, the current rules for withdrawing this amount will still apply.

RETIREMENT POT

Starting September 1, 2024, two-thirds of your future contributions will go into the Retirement Pot.

The funds in this pot won't be accessible until you retire and will be used to provide your retirement income.

SAVINGS POT

Starting September 1, 2024, one-third of your future contributions will go into the Savings Pot.

Additionally, 10% of your Vested Pot (up to R30,000) will be transferred into the Savings Pot as a starting balance (seeding capital).

You can withdraw cash from this pot once per tax year, but withdrawals are subject to a transaction fee and tax based on your marginal tax rate, with a minimum withdrawal amount of R2,000.