Two-pot system a huge risk for your old age, Solidarity warns

3 June 2024

Solidarity has expressed a serious warning about the so-called two-pot system in terms of which annual withdrawals from an individual’s retirement money will now be possible.
This comes after Pres Ramaphosa’s signing of the Revenue Laws Amendment Bill into law on Saturday – something that will require feverish preparation from pension funds and fund administrators before the system comes into effect on 1 September 2024.

As from this date, employees will have access to their pension funds’ savings pot, provided that there is a balance of at least R2 000 in the fund to withdraw. The savings pot represents one-third of the total fund, while two-thirds are preserved for retirement and must remain untouched.
Only one withdrawal is allowed per year. 

Although the system also aims to give employees access to funds for emergencies, it certainly entails risks, Solidarity Deputy General for Strategy Marius Croucamp warns.
“The main risk is that on the day of retirement there will be much less retirement money available to an individual who has withdrawn funds from his or her savings pot. They will then probably have to get additional income from somewhere to be able to take care of themselves in their old age. 

“There will be a huge temptation to withdraw money with ease from the savings pot because it will be possible to do so annually. It must also be borne in mind that the money that has been withdrawn will be taxed at an individual’s marginal tax rate because it is considered as income. This could subsequently place the person in a higher tax bracket,” Croucamp said.

He warns that people should make sure their tax affairs are in order and up to date before they consider withdrawing money from the savings pot.

In such cases where home loans have been granted by funds, he cautions the funds to make sure there is enough money to cover the particular loan or guarantee before payouts are considered from the savings pot. 

“Retirement funds must also amend their fund rules to comply with the requirements of the two-pot system. As there are hundreds of retirement funds in South Africa, the authorities will have their job cut out to approve all the amendments by 1 September 2024,” Croucamp said.

However, provision for retirement remains the main concern, given that only 6% of South Africans can retire comfortably, with more than 70% who will have to find additional income after retirement to survive. 

“According to calculations you have to work for 41 years and save at least 15% of your income in a retirement fund every month just to receive an amount equal to 75% of your last salary on a monthly basis upon your retirement,” Croucamp said. 

According to him, regular withdrawals of retirement money before retirement will make it almost impossible to provide adequately for your retirement and thus poverty could be individuals’ fate in their old age. 
It remains extremely important to treat retirement money responsibly and sensibly notwithstanding this law amendment.

Issued by Marius Croucamp, Deputy General Secretary: Strategy, Solidarity, 3 June 2024