Do you understand the two-pot system?

The two-pot retirement system marked its first anniversary since its implementation on September 1, 2024.
However, people’s understanding of the rules remains limited.

Many were eager to access the savings pot. However, the rules limited withdrawals to a minimum of R2 000 and the maximum in the savings pot once per tax year.

Withdrawals get taxed at the member’s marginal income tax rate, and if they owed SARS money, the withdrawals could be reduced to offset the debt.

Despite a substantial education drive by the retirement funds industry, misunderstandings persisted, leading to complaints lodged with the Office of the Pension Funds Adjudicator (OPFA).

Naheem Essop, the deputy of the Pension Funds Adjudicator, recently dismissed two complaints where funds refused multiple withdrawals from the savings pot or a withdrawal from the vested pot, finding that the funds had followed their rules and national legislation.

The two-pot system splits retirement contributions into three components:
• Vested pot: Contributions made before September 1, 2024, and subject to the old rules;

• Savings pot: Seeding capital, plus one-third of contributions after implementation. Withdrawals could be made before retirement or resignation, subject to a minimum of R2 000 and one withdrawal per tax year;

• Retirement pot: Two-thirds of new contributions; preserved until retirement. There is no upper limit on the amount one can withdraw from the savings pot, and the amount in that pot can be accumulated over time. However, only one withdrawal per tax year is permissible;

• Retirement pot: Two-thirds of new contributions; preserved until retirement. While public interest grows in multiple withdrawals due to financial hardship, the OPFA assessed complaints in line with legislation.

The National Treasury emphasised that the two-pot system aims to balance short-term relief with long-term retirement security. Allowing multiple withdrawals could undermine this goal by depleting retirement savings.

Savings-pot complaint
One complaint involved the savings pot initially funded by seeding capital in the first financial year, and thereafter by one-third of post-September 1, 2024, contributions.

The seeding capital is 10% of your retirement savings as of August 31, 2024, capped at R30 000. This amount is transferred from your vested pot to your savings pot, giving you an initial balance that can be accessed before retirement.

Once this amount is accessed, the savings pot can only be funded by a third of the contributions made after September 1, 2024. No further benefits can be accessed in the absence of contributions made after the implementation date

The complainant purchased a retirement annuity from Lifestyle Retirement Annuity Fund on October 5, 2006, with a retirement date of October 5, 2038. He was paid his savings component benefit of R21 937.23 (after tax) on September 13, 2024.

He was unhappy that the fund denied him a second withdrawal since his policy was paid-up. He stated that his desired outcome was for the fund to allow him to access his ‘annual withdrawal’.

He stated that when he asked the fund about his withdrawal this year, they said that since he was no longer making contributions, he could not make a future withdrawal.

He submitted that the total of his fund credit amounted to R700 000, with savings of R200 000. He stated that he had only made a withdrawal of R30 000 from his benefit. He said the fund’s statement that he exceeded his withdrawal limit was irrational.

In response, the fund stated that the complainant’s premium payments were discontinued on November 1, 2014, and the policy’s status changed to paid-up on October 23, 2014.

The policy remained active; however, no premium was received under it. The complainant’s funds remained invested and continued to grow in accordance with the selected portfolios.

The fund stated that in September 2024, the complainant applied for a maximum savings withdrawal. He was paid a savings component benefit of R21 937.23, less R7 707.44 for tax. The complainant’s savings component was reduced to zero.

As no premiums were received after September 1, 2024, no further allocations were applied to the complainant’s savings component, and therefore, there was no accrual to this component.

The fund submitted that while members are allowed one withdrawal annually, the complainant’s savings portion currently has no benefit, so it could not process the withdrawal.

In his determination, Essop stated the fund rules provide that from September 1, 2024, it had to allocate a once-off amount of 10%, limited to R30 000 of the member’s interest in the vested component, to the savings component.

Since the complainant made no further contributions after September 1, 2024, no further allocation could be made to the savings component.

Based on the submissions above, the complainant was only entitled to what was in his savings pot; the seeding capital, which had been withdrawn in the previous tax year.

Since the fund received no further contributions, no amount was available for withdrawal in the second tax year, despite the fact that the complainant still had credits in his vested and retirement pots.

Essop said he was satisfied that the complainant’s savings withdrawal benefit was paid in accordance with the fund’s rules and that there were no further benefits due to him. Thus, he dismissed the complaint.

Vested-pot complaint
Another complainant stated that the South African Retirement Annuity Fund refused to pay him the vested component in terms of the two-pot retirement system.

A retirement annuity policy was issued as an Investment Horizon Retirement Plan to the fund for the benefit of the complainant on November 1, 2002.

The policy had been paid up since February 25, 2008. The complainant was paid a withdrawal benefit from his savings component of R4 205.70 on October 12, 2024, and was aggrieved by the fund’s refusal to pay his fund credit allocated to his vested component after the two-pot retirement system’s implementation.

He submitted that both the old and new rules permit a member to access their vested component when the member suffers financial hardship linked to retrenchment, resignation or dismissal.

He said he lost his job several years ago and had not worked since. He said he withdrew his savings component and had only R42 000 in his vested component. He had a nil balance in his retirement and savings component.

The fund said the complainant could only claim his full retirement benefit if he was 55 years old or older. The complainant could claim his retirement benefit before 55 if he was permanently disabled and submitted a valid disability claim, the combined value of his retirement and vested component was less than R15 000, or he formally emigrated from SA and provided the fund with the necessary documentation.

The fund submitted that the complainant was not 55 years old and the current value of the policy exceeded R15 000. The fund said the policy was paid up before the implementation of the two-pot system.

It submitted that the full value was subsequently allocated to the vested component and savings component, in line with the system’s transition, and that the complainant had previously accessed the seeded portion allocated to the savings component.

The fund paid the complainant a savings component withdrawal benefit of R4 205.70 on October 12, 2024. After September 1, 2024, the complainant was entitled only to his savings component upon his request.

He would only be entitled to his retirement component upon reaching retirement age. The complainant would only be entitled to his vested component in a retirement annuity when he reached retirement age.

Essop stated that the fund had to comply with the Act and its rules to pay the complainant his vested component, which was payable only upon the complainant reaching the normal retirement age.

Regarding the vested component, the rules previously applicable to withdrawals remained. Since there were always limits on withdrawals from retirement annuities, the complainant was not entitled to an early withdrawal from his vested pot.

He could not order the fund to pay out the complainant’s full retirement benefit, as this would be unlawful. Thus, this complaint was also dismissed.