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What the two pot retirement system means for retirees

National Treasury is working on introducing the two component retirement system (previously the two pot retirement system), which is intended to be implemented on 1 March 2024.

The two-component system will require a retirement fund to actually create three components: a savings component, a retirement component and a vested component.

These are outlined below:

The savings componentwill enable members facing financial hardships to access one-third of their retirement savings without having to resign from their jobs or funds. Members can make one withdraw from this component with a minimum of R2000 every year of tax assessment (i.e. between 1 March every year until the end of February the following year). Any amount from your savings component paid out on your retirement or death will be taxed accordingly.

The retirement component is equal to two thirds of savings in the fund and should grow with investment returns.  This component must be preserved until retirement. Retirement fund members are prevented from withdrawing from this pot at any time before retirement. When you retire, the full retirement component must be used to purchase a pension that will provide income in retirement.

The vested component consists of contributions of members who joined retirement funds before 1 March 2024. These contributions will be ring-fenced and are subject to the existing (pre-two pot) legislation. These members can withdraw funds from the vested component in full if they resign. At retirement, they can take up to one third as cash, while at least two thirds must be used to buy an annuity. You will not have a vested component if you were not a member of a retirement fund before 1 March 2024.

Transfers between components

A member with vested component can elect to transfer 10% up to a maximum of R25 000 into the savings component after 1 March 2024 to ensure that the savings component does not start with a zero balance.

What does this mean for retirees?

If a member retires post March 2024, the same concepts apply. A member must purchase an annuity (life, living, or blended) to provide an income in retirement. This must be funded from two-thirds of the vested component and the entire retirement component.

A member can cash out the combined value of the savings component and one-third of the vested component, of which R550 000 is tax free. If a member made withdrawals prior to their retirement date, the amount that is tax free is R550 000 less the previously withdrawn amount.

Just SA is participating in a discussion with the Association of Savings and Investment South Africa (ASISA) Regulatory Sub-Committee to provide input.

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