Money and Markets

The new rules that will let you withdraw pension money every year: what you need to know

Business Insider SA
(Getty)
(Getty)

  • South Africa is due to introduce a "two pot" system for pensions.
  • The new approach is intended to give you access to your retirement savings in an emergency, while keeping people from resigning to get their hands on their pension money.
  • The two-pot system may be in place during 2023, but don't believe that until you see it.
  • You probably won't get access to money you've already saved for retirement.
  • For more stories go to www.BusinessInsider.co.za.

South Africa is now due to move to a "two pot" system for retirement savings in 2023, the National Treasury announced this week.

The timeline is "optimistic", it admits. But after many years of discussion – and then some urgency brought about by the pandemic – the broad policy approach seems to have been settled.

That means we have a pretty good idea of how the new system of annual withdrawals from pension savings will work, unless things change dramatically while draft legislation is before Parliament. 

Here is what you need to know about the two-pot system for pension money, likely to be in place next year.

The government doesn't want you to resign just to get your hands on your pension money

South Africans have been known to resign simply to get their hands on what can be a significant amount of money in a retirement annuity. That comes at a high cost in the taxes that apply on withdrawing such savings, and worries the government for reasons including people blowing pension money, leaving more people more dependent on government help after retirement.


Covid-19 helped to push the idea, and it is intended to help in similar situations in the future

When the pandemic hit, people were left short of cash for various reasons, including salaries that were suddenly not paid. Facing a pretty dire emergency, they still could not access their retirement savings without doing something drastic such as resigning. Even then, it would take time to access the money.

Had it been in place, the two-pot system would have helped in that situation, Treasury says, and it will be engineered as such. That should mean rapid access to money, within a month or less, and access to enough money to cover expenses for a couple of months at least.


The 'two pot' phrase refers to saving for emergencies alongside retirement

The change is intended to make pension funds into a broader vehicle where you save for both retirement and emergencies – such as a pandemic that suddenly shuts down an employer. 

The idea is that you will have two piles of money, one that you still can not access until after retirement age, and one that you can lay your hands on if you have to, within certain limitations.

You could just save for emergencies using a different vehicle, say regular investments in unit trusts. But with pension savings comes very attractive tax breaks, and you will get the full benefit of those across both pots of money. 


Your newly-invested money will be split, with two thirds locked up – with a cap...

The current proposal will see a specific allocation to each pot: two thirds to standard retirement savings, and one third going into the "savings pot".

The tax deduction rules will remain the same as they are right now, but there will be a limit on how much money you can put into savings. Anything above R350,000 per year, or 27.5% of taxable income, will have to go into the retirement pot.


... but you probably won't be able to dip into your accumulated savings

Discussion around the two-pot system saw a strong push, from the likes of trade unions, to open up prior savings for withdrawals. In its simplest form, that would see all the pension money you've gathered so far split up as new contributions will be, with two thirds still locked up until retirement, and the other third available for emergency use.

The government is deeply opposed to that, for reasons ranging from the strictly technical to the nearly apocalyptic, as South Africans simultaneously scramble for their cash.

The idea of allowing access to accumulated savings isn't dead until the legislative process is completed – but it seems very unlikely. 


If that is the case, nothing will change for the money you have already saved

If access to accumulated funds is not granted, nothing will change for your existing savings. You will still have access to all that money on resignation, for instance, and no rules that currently apply to that money should change.

That means you can carry that "vested pot" through job changes. If you resign from a job but choose not to access the money, you can transfer it to a new pension fund, and still get your hands on it the next time you resign. 


You'll get one withdrawal a year – and you'll be fully taxed on it

The plan is for one – and only one – chance to withdraw money every year. If you take out too little, or face another emergency, tough luck. (Though you may be able to borrow against the following year's withdrawal, at a cost, securing a loan against your ability to access the savings pot after 12 months.)

The money you withdraw will get no special tax treatment. It will be added to your taxable income, and you'll have to pay tax for it just like on other income, even if it pushes you into a higher tax bracket, which means you owe more tax on all the money you make that year.


There is no maximum withdrawal, just a R2,000 minimum

As things stand, you'll be able to withdraw your full savings pot every year. You can't make too small a withdrawal, though; the minimum will be set at R2,000. That also means you'll have to contribute at least R6,000 before you can access any money, of which R4,000 must go into the retirement pot under the two-thirds rule. 


How you spend the money is up to you

Ideally, many policymakers would like to see savings-pot money used only in an emergency, or perhaps as a deposit to buy a home. But everyone seems convinced the paperwork involved in only allowing withdrawals for a specific purpose – and then checking the money is properly spent – just can't be managed.

As things stand, you'll get cash in your bank account, and what you do with it will be entirely your business.


On retirement, you can throw it all into one pot

When you hit retirement age, you'll be able to withdraw the savings-pot money, but it will be taxed as a retirement lump sum. You can, instead, throw the savings money into the retirement pot, in part or in full, and use the whole lot to buy a retirement annuity that pays out monthly, so saving on tax.


If you leave SA, and stay out, you'll get access to all the money

Retirement savings – from both pots – will be payable if you stop being a South African tax resident for at least three years.

Such a withdrawal is subject to tax as would currently be the case. 


The whole thing is a bit tricky, for unavoidable reasons

Retirement savings were always intended to be inaccessible. The deal was that you would save for retirement, and lock that money away tightly, and in return you would get a tax break that amounts to a lot of free money, over time.

Now a system for withdrawing money is being retrofitted to the already complex systems used for pension savings.

Pension funds will have to adjust their rules, and there is the worry that a sudden rush by members to get their hands on money will cause liquidity problems, forcing funds to sell off long-term investments at prices that are not ideal.

That may mean tweaks and changes to how withdrawals work, either to make administration easier or to prevent "perverse outcomes" the Treasury fears could arise, if South Africans find loopholes and exploit them.


We don't know exactly when the new system will really, fully be in place, though split savings are due from March 2023

The comment period for the draft approach on the two-pot system closes at the end of August – but there is a long road to go after that. The approach has to be discussed by at least one committee in Parliament before it can go before the full legislature for consideration. There is no telling how much back-and-forth there could be before finalisation.

Once the law is changed, there is the small matter of setting up the actual systems and paperwork for withdrawals.

The rough plan is to have the two-pots approach operational during 2023, but believe it when you see it.

It is possible that splitting savings into two pots can be operational in March 2023, as planned, while withdrawals are still not technically feasible. 



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