By: Natasha Archary
With the introduction of the two-pot retirement system in South Africa just days away, Mthobisi Mthimkhulu, Direct Clients Manager at Allan Gray joins Gugulethu Mfuphi on Kaya Biz to help listeners achieve better retirement outcomes.
The two-pot retirement system represents a shift in how retirement savings are managed and aimed at improving financial security for retirees while addressing immediate financial needs.
This new framework, designed to strike a balance between long-term savings and short-term liquidity, offers a fresh approach to retirement planning that could lead to better outcomes for South Africans.
However, Mthimkhulu sends a strong reminder that making a withdrawal from the two-pot system should be used as a last restort.
Mthimkhulu said it’s easy to overlook long-term risk when you’re young and think time is on your side.
Withdrawals from the two-pot retirement system will cost you
Yes it’s true, you’ll have access to the money in the “savings pot” of your retirement funds which is designed for emergencies.
To start you off, 10% of your existing savings (capped at R30 000) will automatically be transferred to this Savings Pot as a once-off deal.
Going forward, one-third of your future contributions will fill this emergency pot, ensuring you have some breathing room while the rest of your two thirds contribution towards your retirement pot grows untouched for your golden years.
How the two-pot system works
- Under the Two-Pot system, withdrawals from the Savings Pot before retirement will be taxed at marginal rates, like other forms of income. A marginal tax rate is the amount of tax you pay on an additional unit of income. For example, if you earn more money and enter a higher income bracket, the new income will be taxed at a higher rate. Think of it as climbing a set of stairs, as you earn more, you move up to the next step and the money you earn on that step is taxed at a higher percentage but the income you earned on the lower steps remain taxed at lower rates.
- It is important to understand how withdrawals have a tax impact, on both the withdrawn amount and on the remaining funds.
- Only one withdrawal per tax year is allowed (minimum R2 000).
- Early withdrawals: Cashing out your pension savings when you change jobs can significantly hurt your retirement security in the long run. The Two-Pot System discourages this by limiting access to most retirement funds when you change jobs, promoting long-term savings habits.
- Lack of emergency funds: The National Treasury in partnership with all key stakeholders designed the Two-Pot System to allow early access to a portion of your retirement savings for emergencies. This provides financial security in unexpected situations, while still encouraging you to preserve the majority of your savings for a comfortable retirement.
Listen to the conversation on Kaya Biz:
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