Two-pot retirement system: Pension funds adjudicator says rules are still misunderstood

Although the two-pot retirement system has been running for just more than a year, many people still do not understand the rules and the fact that pension funds cannot make changes to help a specific person, despite the tight financial position they may find themselves in.

Many people are eager to access the savings pot, but current rules limit withdrawals to a minimum of R2 000 per tax year, up to the maximum amount in the savings pot, and no more.

Withdrawals are taxed at your marginal income tax rate and if you owe money to Sars, your withdrawal may be reduced to pay your debt to the taxman first. Many people were left with R0 because the whole amount available was swallowed up by unpaid tax.

You would think that pension fund members would by now know how the rules work, but that is not the case, Naheem Essop, deputy pension funds adjudicator, says.

“Despite a substantial education drive by the retirement funds industry around its implementation, some misunderstandings persist and led to complaints lodged with the Office of the Pension Funds Adjudicator (OPFA).”

Essop recently dismissed two similar complaints when he found that in refusing multiple withdrawals from the savings pot, or a withdrawal from the vested pot, the funds followed their own rules as well as national legislation.

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Three different pots under the two-pot retirement system

The two-pot retirement system allows members to access a portion of their retirement savings before retirement without resigning from their jobs. This system splits contributions into three components:

• The vested pot: Contributions made before 1 September 2024, which remain subject to the old rules.
• The savings pot: This is made up from your seeding capital plus one-third of new contributions (after implementation). You can withdraw from your savings pot before retirement or resignation, subject to a minimum amount of R2 000. There is no upper limit on the amount that you can withdraw from the savings pot and the amount in the savings pot can be accumulated over time. However, only one withdrawal per tax year is permissible.
• Retirement pot: Two-thirds of your new contributions are preserved here until you retire.

Essop says while there is increasing public interest to allow multiple withdrawals from the savings pot in a single tax year, driven by ongoing financial hardship and the desire for greater liquidity in times of need, the adjudicator can only assess complaints about the withdrawal limits within the legislation.

“National Treasury has emphasised that the two-pot retirement system is designed to balance short-term relief with long-term retirement security. Allowing multiple withdrawals could undermine this goal by depleting retirement savings, much to the detriment of members,” he explains.

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Why you cannot withdraw your full savings pot

The ombud’s office received a complaint recently about the rule that the savings pot was initially funded by seeding capital in the first financial year and thereafter with one-third of the contributions made after 1 September 2024.

Essop points out that the seeding capital was 10% of your retirement savings on 31 August 2024, capped at R30 000. This amount was transferred from your vested pot to your savings pot to give you an initial balance that could be accessed before retirement.

“Once this amount was accessed, the savings pot could only be funded by a third of the contributions made after 1 September 2024. If you made no contributions after that, there is no further benefit that can be accessed.”

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

He was unhappy that the fund was denying him a second withdrawal since his policy was paid up, arguing that his desired outcome was for the fund to allow him to access his ‘annual withdrawal’. According to the complaint, when the consumer asked the fund about his withdrawal for the new tax year, he was informed that since he was no longer making contributions, he could not make a future withdrawal.

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Was the fund irrational to refuse further withdrawals?

The consumer said the total of his fund credit amounted to R700 000, with savings of R200 000. He only withdrew R30 000 from his benefit. He said the fund’s answer that he exceeded his withdrawal limit was irrational.

In response, the fund stated that the complainant’s premium payments stopped on 1 November 2014 and the policy’s status changed to paid up on 23 October 2014. Although the policy remained active, no premium was received while the funds remained invested and continued to grow in accordance with his selected portfolios.

According to the fund, the consumer applied for a maximum savings withdrawal in September last year. He was paid a savings component benefit of R21 937.23 and R7 707.44 was deducted for tax purposes.

The withdrawal reduced the consumer’s savings component to zero. As no premiums were received after 1 September 2024, no further allocations were made to the consumer’s savings component and therefore there was no accrual to his savings pot.  

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No benefit left

The fund said while members are allowed one withdrawal annually, the consumer’s savings portion currently has no benefit and therefore no withdrawal could be processed.

Essop said in his determination that based on the rules of the two-pot retirement system the consumer was only entitled to what was in his savings pot which was the seeding capital he already withdrew in the previous tax year.

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

“I was satisfied that the consumer’s savings withdrawal benefit was paid according to the fund’s rules and that there were no further benefits due to him. His complaint was dismissed.”

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No more savings left to withdraw

Another consumer complained that the South African Retirement Annuity Fund refused to pay him the vested component or savings pot. A retirement annuity policy was issued as an Investment Horizon Retirement Plan to the fund for the consumer’s benefit on 1 November 2002.

The policy was made paid-up since 25 February 2008 and in October last year the consumer withdrew R4 205.70 from the savings pot. However, he was not happy with the fund’s refusal to pay his fund credit in the savings pot after the two-pot retirement system was implemented.

He said the old as well as the new rules permit a member to access their vested component when the member suffers financial hardship linked to retrenchment, resignation or dismissal. The consumer said he lost his job some years ago and has not been employed since.

However, the fund said the consumer is only permitted to claim his full retirement benefit if he is 55 years old or older. He could only claim his retirement benefit:

• before he turns 55 if he is permanently disabled and submits a valid disability claim;
• if the combined value of his retirement and vested component is less than R15 000; or
• he formally emigrated from South Africa and provided the required documentation.

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Consumer does not meet requirements

The fund said the consumer is not 55 years old and the current value of the policy exceeds R15 000. According to the fund, the consumer’s policy was paid up before the two-pot retirement system was implemented.

It said the full value was subsequently allocated to the vested component and savings component, in line with the system’s transition. He also received the benefit he was entitled to.

Essop said in his determination that the fund was bound to comply with the Pension Funds Act and its rules to pay the consumer his vested component and the rules that were previously applicable to withdrawals remain since there were always limitations on withdrawals from retirement annuities.

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