It's been hailed as a groundbreaking move that could usher in a new era of financial flexibility while helping South Africans be better prepared for retirement.
From 1 September the pension system will start operating differently, becoming a "two-pot" scheme that will give members of pension funds access to some of their savings.
President Cyril Ramaphosa recently gave the green light to the new Revenue Laws Amendment Act - which means you'll be able to get a slice of your retirement money when life throws you a curveball, while the rest of your money continues to grow until you pack away your working shoes for good.
Experts say this is a good way to address the fact that only 6% of South Africans have enough money to retire comfortably.
Michelle Acton, retirement reform executive at Old Mutual, says it's hoped the law will stop people resigning from their jobs to access their pension money.
This is happening too often, she says - people need money so they leave their jobs, take out their pension and are then left with no job and no or little savings for the future.
"The new system will give you access to some funds but the rest will be ‘locked' so you'll have it when you retire one day. Two-thirds of your pension won't be accessible until you reach retirement," Acton says.
So how exactly does the new two-pot system work? We asked the experts.
WHY IT WAS SIGNED INTO LAW
Francis Marais, head of product development at investment firm Morningstar South Africa, says it was implemented to help South Africans be more prepared for retirement and ease the burden on government.
The more people are prepared for retirement, the less need they'll have to claim a state pension.
You will only be able to draw one-third of your retirement savings - the other two-thirds will be kept in a "pot" until you reach retirement age.
This applies even if you've been retrenched: you'll be able to access one-third of your savings but you won't be able to touch the rest. It will remain in the fund you had when you were employed.
THE BIGGEST CHANGE
Until now, members of a pension fund could access their entire retirement savings when they resigned or changed jobs. Under the new law, only a third will be accessible.
"When people left or changed jobs they could choose whether to take their pension funds, which were subject to tax, or leave them in the fund. Most people took the choice of taking it all," Old Mutual's Michelle Acton says.
This might have seemed like a good idea at the time but it was short-sighted and had negative long-term consequences for retirement.
THE NEW SYSTEM
Although it's called a two-pot system it's essentially a three-pot process.
Retirement savings invested before 1 September, minus 10% (see below), will move into what's called a vested pot (pot 1).
All new contributions after 1 September will be allocated between a savings pot (pot 2) and a retirement pot (pot 3).
Pot 1: This will house all your retirement savings to date minus 10% which moves to pot 2. You can access the funds in this pot if you move jobs or are retrenched.
Pot 2: This is a savings pot you may access once every year. Also, what's left in your savings pot will be your lump sum at retirement.
Pot 3: This is also a pot that you won't be able to access until retirement. The only difference between pot 1 and pot 3 is that pot 1 applies to people who already have savings - if you're only just starting a job only pot 2 and pot 3 will apply to you.
HOW IT WORKS
If, for example, you've accumulated R200 000 in your retirement fund before 1 September, 90% of that amount will go to your vested pot (pot 1), while the remaining 10% will go to pot 2.
This means you now have a vested pot of R180 000, a savings pot of R20 000 and a -retirement pot of 0.
Funds you contribute towards your pension fund from then on will be allocated to your retirement pot (pot 3). The money in your vested pot continues to stay where it is and gain interest.
When you move jobs you can't access your retirement pot - you have to preserve it. You can choose which fund to preserve it in. When you retire you'll receive the money from your vested pot plus the money from your retirement pot.
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You still have all your money, Old Mutual's Michelle Acton explains - it will just live in three different pots.
Everyone has to abide by the law except people who were over the age of 55 in March 2021. They can opt out of the new system but must arrange for things to stay as they are by informing their employer or pension fund provider.
Essentially it works like this, Acton says.
"If you contribute R900 a month to your pension fund, R300 (one-third) goes to your savings pot and R600 (two-thirds) to your retirement pot.
"If you had R20 000 in your savings pot you will now have R20 000 plus R300 in your savings pot and your retirement pot will have R600. And this is how it will grow each month."
Acton says most funds look at gaining growth annually at the rate of inflation plus 4% or inflation plus 5%.
When you leave a job you can access your savings pot or transfer the accumulated amount in your savings and your vested pot to your retirement pot. If you transfer it to your retirement pot you won't be able to access it.
"This is called compulsory preservation," Acton says.
THE TWO-POT SYSTEM
WITHDRAWING YOUR SAVINGS
You can withdraw a minimum of R2 000.
There is no cap on how much you can withdraw with the exception of the once-off transfer of your funds from your vested pot when the new scheme begins.
This has a cap of R30 000 - so even if you have R1 million in your vested pot you'll only be able to transfer R30 000 (to your savings pot) in the first year of the new system. After that you can draw as much as you need to from your savings pot.
"If you build a savings pot of R200 000 over the next couple of years and you have an emergency you can take out the full amount if you need to," Acton says.
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She adds it's important to remember that, although the law comes into effect on 1 September, the date when you can withdraw from your savings pot will be based on administration processes and what they will need to do before they will be "ready to pay".
IT systems will all need to change to enable the pots. Once that's been done you can start doing your calculations.
"I think practically you'll be looking to mid- to end-September before you can start applying for your money," Acton says.
"How long it takes before you get your money will depend on the progress made in getting everything in order."
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In short, the answer is to check with your HR department or your pension fund.
You do have the option to move all your savings to your retirement pot if you want to - this will take away the temptation of dipping into your funds.
You can also move your vested pot money into your retirement pot money.
"It's a one-way move - once it's gone in it can't come out," she says.
THE PROS AND CONS
WHAT ARE THE PROS?
- The system allows you to tap into some of your pension money if you're in a dire financial situation rather than you having to resign to access it.
- It will help the average South African by ensuring they have money when they retire.
WHAT ARE THE CONS?
- You'll be taxed on your withdrawal.
- The amount of growth you earn on your pension pot will be reduced if you withdraw from your savings.
- You might not have enough time to catch up to save again. "You may never get to retire or you may never get enough money to live comfortably in retirement," Naylor-Renn says.
TRY TO IGNORE IT
The best thing you can do is pretend your savings pot doesn't exist, says Caroline Naylor-Renn, COO of investment company 10X Investments.
"Just leave it alone and let it grow."
Withdrawing your savings should be done only in extreme circumstances, 10X Investments says. Examples are medical emergencies, urgent home repairs, legal issues and cases of natural disasters where you aren't covered by insurance.
Your savings pot gives you the chance to bounce back but should only be accessed when absolutely necessary.
AND THEN THERE'S TAX
No benefits from your savings pot can be paid until your pension fund provider has applied for a tax directive.
"A tax directive is basically an instruction from SARS telling providers how much tax they must withhold. The balance will then be paid to the member," Acton says.
Although everyone is pushing to be ready by 1 September "there's a lot to be done", she adds, and it's difficult to say exactly when providers and SARS will be ready.
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However, she adds it's vital that your tax affairs be in order.
"If not, SARS won't grant a tax directive and they can take any money you owe them first. You will also need a tax number."
You can only access your savings once per tax year - from 1 March to the end of February - and the amount you'll be taxed will be based on your income and the tax bracket you fall under.
"Any withdrawals from your savings pot fall under the definition of taxable income," Acton says.The marginal tax rate is between 18% and 45%. If, for example, you earn R150 000 a year you will be taxed at a rate of 18% and anything you withdraw from your savings will be taxed at that rate.
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The more you earn, the more you pay - people earning over R1,8 million a year, for instance, are taxed 45%. You need to have a minimum of R2 000 in your savings pot to have access to these funds.
"The reason for this is it's not designed to be a transactional account but rather an emergency savings fund," Acton says.
"The most important thing about this new system is for you to have a lump sum at retirement. The savings pot is just enabling you to have some access to your money if you desperately need it."
MANAGE YOUR MONEY
Hayley Parry, money coach and facilitator at 1Life's Truth About Money, says the reality is most South Africans are battling to make ends meet but saving - over and above your pension fund - is essential.
If you can, she says, you should start putting your own emergency fund in place, so you don't have to withdraw from your pension savings pot. "That's always first prize," she adds.
"We should all focus on paying ourselves first. This means on the day your salary lands in your bank account, put a portion of it into a different account. My tip is to automate that with a debit order and that first profit piece you're building is your emergency fund.
"The first goal is to hit R5 000 and then to reach three months of living expenses. Once you have that in place there will be no need to withdraw from your savings pot."
EXTRA SOURCES: TREASURY.GOV.ZA, OLDMUTUAL.CO.ZA, BUSINESSTECH.CO.ZA, BUSINESSLIVE.CO.ZA, NEWS24.COM
