And now there are three
If the draft bills are approved, from March 2024 members’ retirement funding will be split into three pots. Namely:
The main pros and cons
Advocates for change regard the introduction of an accessible savings pot as good for those facing a financial crisis (such as that created by the Covid pandemic). This savings pot should assist in preventing people from resorting to debt to cover their expenses. The changes will also stop people from resigning to access all their retirement funds.
Those against the change highlight that most South Africans can’t afford to retire anyway – and giving them access to a part of their retirement funds will exacerbate the current dilemma.
According to a recent survey by Just SA, only 11% of South Africans over 50 feel “really confident” that their savings will last if they live to 100. For 57% of respondents, their retirement plan is to rely on their children or grandchildren.
The three pots – what you need to know
All your retirement savings accumulated before 29 February 2024 will remain untouched, although you can have 10% of your funds, up to a maximum of R25 000, transferred to your savings pot. This means you won’t have to wait for the savings pot balance to grow. But beware: any transfers to the savings pot are taxed at your marginal tax rate.
Once the new regulations are in effect, members will no longer be able contribute to their vested pot. With one exception: Provident fund members who were 55 years or older on 1 March 2021 will be able to continue making contributions to their vested component. They will also have the option of using the new system and having their contributions split between savings and retirement pots.
Members must contribute 1/3 of their retirement contributions to this pot and can make a withdrawal once a year. The minimum withdrawal amount is R2 000 but there’s no maximum amount. Any withdrawals will be treated as income and taxed at your marginal tax rate.
Members must contribute 2/3 of their retirement contributions to this pot which must be preserved until the normal retirement age as specified by the fund’s rules.
Members may withdraw from the retirement pot should they emigrate from South Africa and cease to be tax residents, but as usual, they will need to wait for three years until they can access their funds.
National Treasury has said they will also consider withdrawals from the retirement pot for a retrenched member with no other income source.
What happens on retirement?
When members reach retirement age, they can add the savings pot to the retirement pot to purchase an annuity or withdraw the total amount in the savings pot as cash. Cash withdrawals will be taxed according to the retirement lump sum tables. The lump sum tables have more friendly tax rates (maximum of 36%) than the marginal rate table that apply to annual withdrawals pre-retirement from the savings pot (maximum of 45%).
On retirement, the total amount in the retirement pot must be used to buy an annuity. The minimum amount that can be used to buy an annuity is R165 000: lesser amounts in the retirement pot can be withdrawn as a lump sum.
More from the taxman
What about defined benefit funds and legacy RA’s?
Is it really possible?
The new legislation will require funds to change their rules, train staff, educate members and introduce complicated systems.
Although industry bodies have expressed concern that there won’t be enough time to implement the changes, a spokesperson from Sanlam said that the legislation will likely go through in 2024 as it is an election year.
Another concern is that the changes may hurt funds if too many members transfer funds from their vested to their savings pot and make withdrawals (despite the tax implications). There’s concern that the accessibility of investment opportunities may lead to impulsive purchases rather than genuine necessity.
We recommend discussing the implications of the new rules on your retirement planning with us. There are many factors to consider, including tax efficiency, asset allocation, and preservation options.
Discuss your retirement needs with us.
Complete Your Financial Plan
Sign Up To Our Mailing List
August 4 - How to Take Advantage of the Donations Tax AllowanceAugust 3 - Five Reasons why a Financial Windfall Must be Managed CarefullyAugust 2 - What’s Cooking with the Three-Pot System?August 1 - Make Sure Your Family is Financially Prepared for When You Pass AwayJuly 4 - A Must-Have for Couples who Choose not to Tie the KnotJuly 3 - Can Gratitude Make you Feel Better About Your Money?July 2 - Four Ways to Make the Most of RetirementJuly 1 - How to Invest When There’s So Much Bad NewsJune 4 - The Ins and Outs of Compulsory AnnuitiesJune 3 - Who is Influencing Your Financial Decisions?June 2 - R is for RebalancingJune 1 - Don’t let Money Ruin Your RelationshipMay 4 - Five Ways to Teach Kids About MoneyMay 3 - Much Ado About RiskMay 2 - Living Wills: A Must Have, Despite the Grey AreasMay 1 - What is True Wealth?April 4 - How the 2023 Budget Will Impact Your PocketApril 3 - Three Financial Imperatives for Women in DivorceApril 2 - Should You Ask ChatGPT for Financial Advice?April 1 - Compound Interest: The Eighth Wonder of the WorldMarch 4 - How a ‘Safe’ Fixed Deposit Might Still be RiskyMarch 3 - Thinking of moving to Australia? Bear these numbers in mindMarch 2 - Avoid These 6 Barriers to Wealth CreationMarch 1 - How Good do You Think You Are at Investing?February 4 - Is Money Stress Taking a Toll on You?February 3 - Why an Endowment is One of the Best Ways to Invest OffshoreFebruary 2 - Why too Much of a Good Thing Can be a Bad ThingFebruary 1 - Invest With FIRE and Never Look BackJanuary 4 - Why Lottery Winners End up Broke: The Importance of Your Financial ContextJanuary 3 - Discover the Freedom of a Tidy PortfolioJanuary 2 - Why You Absolutely Should be Investing in EducationJanuary 1 - Four Simple Steps to Start the Year on the Right Financial Foot
December 4 - What is This Volatility Risk People are Always Talking About?December 3 - Why You Need to Watch Out for The Butterfly EffectDecember 2 - 6 Ways to Achieve Financial FreedomDecember 1 - Three Books for the HolidaysNovember 4 - The Question of LoyaltyNovember 3 - Why do we Even Have Bull and Bear Markets?November 2 - Should I Buy a Holiday House?November 1 - Put Stocks, Rather Than Socks, Under the Tree This ChristmasOctober 4 - Can You Take Out Life Insurance on Someone Else?October 3 - Loss Aversion and Lifestyle Creep – How Behaviour Influences SavingOctober 2 - Why Timing Might be Everything in Retirement – Especially in a Bear MarketOctober 1 - Get Rich - Stay Rich Eight Mistakes Wealthy People Never MakeSeptember 4 - Capital Gains Tax: 10 Common Questions AnsweredSeptember 3 - The Risk That Many Investors Don’t Think AboutSeptember 2 - Much Ado About Regulation 28 and the Private InvestorSeptember 1 - The “Two Bucket” Retirement Savings System: What is it and Why is it Important?August 4 - Retirement Planning for Age-Gap CouplesAugust 3 - A Simple “50-15-5” Budget Hack for Women (and Men!)August 2 - Does Your Family Need a Constitution?August 1 - Women’s Month: Three Ways You Can Improve Your Money HealthJuly 4 - Five Things to Check When a Loved One Passes AwayJuly 3 - Rules of Financial Planning For a Special-Needs ChildJuly 2 - Why Your Financial Plan Should Cater For Possible DementiaJuly 1 - Why Inflation is the Most Important Investment BenchmarkJune 4 - How Relevant Is The 4% Rule of Thumb These Days?June 3 - Why You Should Treat Your Finances Like Your HealthJune 2 - Is Your Business Good Retirement Capital?June 1 - With the Limits Raised, How Much Should You Invest Offshore?May 5 - Quote of the Month: Challenging the Rejection of an Insurance ClaimMay 4 - Financial Products: The Less You Understand, the More You PayMay 3 - The Miracle of Investment Debit OrdersMay 2 - Five Things to Think About as Interest Rates RiseMay 1 - Stay Calm When the Bear ProwlsApril 5 - Quotes of the Month – The War in UkraineApril 4 - Smart Ways to Give: During and After Your LifetimeApril 3 - Take These Three Steps to Break the Money Shame SpiralApril 2 - When Things Don’t Go According To (The Financial) PlanApril 1 - What Amazon and Ford Can Tell Us About DiversificationMarch 4 - Quotes of the month – What the NFT?March 3 - How to Avoid Losing Your Life’s Savings to a “Tinder Swindler”March 2 - The Different Ways to Invest: What Does It All Mean?March 1 - Three Reasons You Shouldn’t Wait to Talk to Your Kids About MoneyFebruary 6 - Quote of the Month – Don’t Cash In Your Retirement SavingsFebruary 5 - Should You Top Up Your Retirement Annuities Now?February 4 - Don’t Let Delays in the Master’s Office Leave Your Family in Financial DistressFebruary 3 - Don’t Let Delays in the Master’s Office Leave Your Family in Financial DistressFebruary 2 - Three Reasons an Insurer Could Cancel Your PolicyFebruary 1 - Investing: Men and Women See Things DifferentlyJanuary 4 - Quote of the month – Stay invested!January 3 - What SARS Says About Crypto Assets and TaxJanuary 2 - Three Ways to Leave a Legacy, And Not Just an EstateJanuary 1 - Red-Carding the Myth of The Rational Investor