With the implementation date just around the corner, the basic outline of National Treasury’s proposed Two-Pot System for retirement savings is well known by now. It’s a major industry reform, designed to promote preservation of retirement savings while providing limited early access to a portion of those savings, in case of an emergency.

“Two-Pot is a major feature of the bigger picture of retirement-industry reforms,” says Michelle Acton, Retirement Reform Executive at Old Mutual.

“Tax deductibility was aligned in 2016. We then had provident fund alignment in 2021. Two-Pot is coming through in 2024 with its compulsory preservation element. Treasury has been very clear on the next steps, which are increased consolidation of retirement funds and auto-enrolment, where all employers must provide retirement benefits or funds for their employees. So, there’s still quite a bit of work to be done.”

For now, though, all the attention is on Two-Pot. Retirement-fund members are, naturally, eager to see how it will affect their retirement-saving outcomes, while retirement-fund administrators are – or should be – putting processes in place to cope with the changing demands from their members.

Under the current rules, a retirement-fund member may withdraw all their retirement savings when they leave their job. Not everybody does this, but very many do – and it has a significant impact on their outcomes at retirement. Under the new regulations, you won’t have to leave your job to access your retirement savings, but you will have access to far less of those savings.

The balance between early access and increased preservation lies at the heart of the Two-Pot System.

Pots, components and updated regulations

In June 2023, Treasury made its revised 2023 Draft Revenue Laws Amendment Bill available for public comment. “Industry and Treasury have been working very closely together to get the regulations to where they are, so there weren’t many surprises,” says Michelle. “However, it’s worth restating that these regulations are still in draft form, so things could still change before the Two-Pot System comes into effect.”

One of the major updates in the new legislation sees the word “pot” replaced by “component”. “It will still be referred to as the Two-Pot System, but instead of talking about pots, we’ll talk about a Savings Component, Retirement Component and Vested Component,” she explains. “There was a perception that these pots would sit separately. They will not. Your total fund credit will be made up of these various components. That total number is what you need to focus on.”

How the components work

Under the new regulations, which will only apply to contributions made after 1 March 2024, your existing retirement savings will be allocated to what is called a Vested Component and will be subject to the existing rules. The draft legislation also indicates that from 1 March 2024, a maximum of 10%, capped at R25 000, of your existing savings will be transferred into the Savings Component. This is called a “seeding” amount, and it’s just so that you’re not starting from zero.

“From where we are, in 2023, Two-Pot focuses on your future money only,” Michelle says. After the effective date, one-third of your retirement savings will go to the Savings Component and two-thirds will go to the Retirement Component.

“Your one-third Savings Component is your lump-sum payout at retirement,” she explains. “This is what’s been getting all the attention, because it allows for early access – but remember that if you do make an early withdrawal, you will be borrowing from your future self. If you get to retirement and there is nothing left in that Savings Component, you will get no lump sum at retirement.”

The two-thirds Retirement Component, meanwhile, can't be touched before retirement. “You will not be able to access this Retirement Component before retirement (except in the case of emigration), and when you get to your retirement day, that amount can only be used to purchase your pension,” says Michelle.

The Vested Component

The Two-Pot System features the three components: Savings, Retirement and Vested. But as the June 2023 updates confirm, the Vested Component has its own elements, each of which has its own set of rules.

Depending on which retirement savings you currently have, the Vested Component could consist of a Pension Component, which allows for 100% access before retirement at withdrawal (i.e. at resignation or retrenchment), with one-third going to a retirement lump sum and two-thirds allocated to a monthly pension. It might also include a Provident Component, which also allows for full access before retirement at withdrawal, and with 100% allocated to your retirement lump sum.

Finally, you might have a Retirement Annuity Component, which can't be accessed before retirement and is divided into one-third for a retirement lump sum and two-thirds for a monthly pension.

Each of those components and their sub-components must be managed carefully to ensure the best outcomes at retirement.

Retirement-annuity funds underpinned by legacy-fund member policies will also have an option to apply for an exemption from these reforms.

On that note, the updated regulations confirm that provident-fund members over the age of 55 will have the option of staying with their current fund or moving to the new Two-Pot System. Michelle recommends that fund members who are approaching retirement age should seek advice around this from a trusted and informed financial advisor.

Preparing for the change

Under the new regulations, fund members will have access to their Savings Component once per year of assessment – in other words, once a year between 1 March and 28 February. (You may withdraw as much as you like, with a minimum withdrawal of R2 000.)

“At Old Mutual, we expect about 350 000 members to come forward on 1 March 2024 and claim money from their Savings Component,” says Michelle. “This is over 50% of the 600 000 members we are administering. For us, that’s where the focus is.”

And a lot of preparation is underway.

“We're prioritising being ready for Two-Pot on 1 March 2024,” she says. “Our admin team is working on different mechanisms to ensure that we can process claims, manage the split of contributions into the various components, and so on.”  Of course, this is subject to the legislation being finalised timeously.

Old Mutual understands that the broader retirement reforms process does not end on 1 March 2024. “Many more changes will come,” Michelle concludes, “as the industry implements Two-Pot, auto-enrolment and other initiatives aimed at helping South Africans to enjoy the best outcomes possible when they retire.”

If you want more insights and views on the Two-Pot System and what it will mean for you, your employees and your business, visit our Two-Pot page.