It’s very easy to focus our efforts on our more immediate financial needs, and all too often this comes at the cost of our long-term goals. Quite unintentionally we end up neglecting what we should be doing for our future wellbeing. We’re talking, of course, about the importance of planning for your retirement. While it’s understandable to overlook this financial objective, the fact is that retirement should be a financial priority for everyone.  

With the recent launch of the Two-Pot System on 1 September 2024, we thought that there was no better time to take a deeper look at this retirement strategy so that you can start thinking about how to secure your financial future. 

Why Retirement Matters 

It may feel light years away, but the fact is that retirement is closer than you think. Don’t believe us? Whip out your calculator and, based on your current budget, calculate how much you would need to have every month for one year. Now multiply that for around 10 to 20 years’ worth of funds needed for your retirement. It’s a shocking amount – especially when you consider that you’re the one who has to save all this money before you get to kick back and take it easy.  

Unfortunately, many South Africans underestimate the importance of retirement savings, often believing that their government pension or family support will suffice. 

So, why does planning for your retirement matter so much? Well, for starters, people are living longer and are finding that they need much more to support themselves in retirement. It’s also become apparent that in these tough economic times, saving for your retirement means that you can maintain your independence and avoid burdening your family. Let’s not forget that the cost of living will continue to rise, meaning that your retirement savings must outpace inflation. Additionally, there may be unexpected expenses along the way.  

What many financial experts have pointed out is that South Africans are on the receiving end of limited government support. The general thought is that relying solely on government grants or pensions is risky, because these funds don’t usually give you enough for a comfortable retirement. 

However, is this still the case now that the Two-Pot System has been introduced? Let’s find out. 

What is the Two-Pot System? 

If news of the two-pot system is, well, news to you, then let’s take a moment to unpack this. Essentially, this system is designed to help you save for retirement, while simultaneously providing you with a safety net for emergencies.  

Oddly, while it’s called a ‘two-pot’ system, your contributions are divided into three pots. Namely, the Vested Pot, the Savings Pot, and the Retirement Pot. 

Here’s a closer look at each pot: 

1. Vested Pot: Here’s where your existing retirement savings that you accumulated until 31 August 2024 go. The rules for accessing this pot remain unchanged, allowing you to withdraw funds as per the previous regulations. 

2. Savings Pot: The retirement savings you accumulated until 1 September 2024, up to R30,000, goes into this pot. From then on, a third of your contributions will be allocated here, from which you can make withdrawals once a year. 

3. Retirement Pot: The remaining two-thirds of your contributions are saved into this pot, strictly for retirement purposes. 

How Does the Two-Pot System Work? 

The Two-Pot Retirement System applies to all retirement savings schemes in South Africa, including pension funds, provident funds, retirement annuities, and preservation funds.  

If you’re wondering how it all works, then we can help you with a brief outline, although it must be stated that professional services are always the best way to plan for your financial future. 

As a starting point, 10% of your retirement savings that you already accumulated up until 1 September 2024 (up to a maximum of R30,000) would be allocated to your Savings Pot. It’s from this pot that you can make a withdrawal once a year. Just so you know, the minimum withdrawal amount is R2,000, and these withdrawals will be taxed according to your income tax rate. You should also take note that if you have outstanding taxes or penalties due to SARS, these may be deducted from your withdrawal. 

Now, after this date, a third of the amount you have decided to contribute towards your retirement savings going forward will be stashed in your Savings Pot. The remaining two-thirds of your contributions are then allocated to your Retirement Pot. This is the pot you can’t access at all until you officially retire.  

In this way, you have the best of both worlds. You can access your savings for emergencies while keeping up your savings for your golden years – which is why the Two-Pot Retirement System is considered such a game-changer for South Africans. The sense from those who believe in this system, is that people can take advantage of a balanced and realistic approach to saving for retirement using this system.  

Feeling informed?  

We believe that prioritizing your financial future and taking the time to understand the new retirement legislation will give you the power to control your financial future.

If you want to find out more about how the Two-Pot System can benefit you, then we urge you to please consult your retirement fund provider, financial advisor or the Two-Pot System Retirement Calculator. Remember, with the right planning, you can achieve the financial security you deserve. 

Don’t forget that AA Inform is home to a range of useful financial tools and resources, including access our Loan Repayment Calculator, free property valuation reports, and multiple advice pieces on how to plan for your retirement.  

We trust that this will help you make the best choice for your financial future.