The Two-Pot Retirement System and Preservation Funds

The Two-Pot Retirement System is a reform designed by The National Treasury and implemented in South Africa in September 2024. It applies to preservation funds, retirement annuities, pension funds and provident funds. These vehicles will now comprise of two ‘pots’. The first pot is the savings component, and the second pot is the retirement component. To make matters more interesting, there is also a vested component (a kind of third pot) and this refers to all funds invested prior to September 2024.  

The aim behind the Two-Pot Retirement System is to provide financial stability, encourage individuals to save for retirement and reduce the financial strain on South Africans. Allowing members access to their savings pot once per year in order to pay for any emergencies or unforeseen expenses can reduce the stress of having funds wrapped up in inaccessible retirement products. Their retirement pot will remain invested until retirement and can’t be accessed before age 55 according to current legislation (There are special circumstances where the funds may be accessed earlier). It is thought that this will result in a larger amount of funds being preserved for retirement in South Africa than prior to the implementation of the Two-Pot System. 

The structure of the Two-Pot Retirement System is such that retirement savings are split between the savings pot and the retirement pot. The savings pot is more accessible in case of emergencies, while the retirement pot is for your long-term retirement savings. One-third of contributions will be invested in the savings pot, and two-thirds of savings will be invested in the retirement pot. The vested component refers to all funds that were invested prior to the Two Pot System coming into effect in September 2024.  

You are able to withdraw once a year from your savings pot as long as you adhere to the specific conditions. Previously, you would have only been entitled to one withdrawal from your preservation fund before retirement, with different withdrawal rules for pension funds, provident funds and retirement annuities. The vested pot is subject to the same rules that were in place prior to the Two-Pot System implementation. 

The rationale behind the Two-Pot Retirement System is that South African citizens will be encouraged to save for retirement, with the knowledge that they are able to access some of their savings if need be, thus providing some more flexibility. These savings could be used for a “rainy day”, such as medical emergencies or emergency house or car repairs.  

Preservation Funds 

Preservation Funds are retirement savings vehicles that allow you to “preserve” a lump sum retirement savings amount that may have been transferred from a pension or provident fund when you changed jobs. It allows for the funds to be reinvested, continue to grow and eventually provide for your retirement. A preservation fund does not allow for further contributions, but it does offer many positives along with some worthwhile tax benefits. If you are looking for a good, low-cost preservation fund and you would like to access all of the benefits associated with preservation funds, then look no further than the 10X preservation fund.  

Allocation of Funds 

All contributions to retirement savings products are split between the two pots. One-third of the contributions are invested in the savings pot, and two-thirds of the contributions are invested in the retirement pot. If you have a pension or provident fund, for example, you and/or your employer may make monthly contributions into these funds, which would then be split accordingly. Preservation Funds work a bit differently as they don’t receive additional contributions. 

Let’s look at an example pertaining to Preservation Funds: 

Preservation funds aren’t able to receive further contributions, so the savings pot will grow at the same rate as the total investment. If your total investment grows by three times the size, both the savings pot and the vested amount will also grow by three times the size. 

The vested pot is for any contributions and savings that were made prior to September 2024, before the Two-Pot Retirement System was implemented. These funds are subject to the same rules that were applied to preservation funds before the Two-Pot System was implemented.  

The vested pot can be transferred between employers if you move jobs, so you can move the vested pot from your pension or provident fund to a preservation fund with a different service provider. It will now be the vested pot in your preservation fund, and the same rules will apply as were applied prior to September 2024. You are also able to withdraw from the vested pot as per the pre-September 2024 rules pertaining to preservation funds.  

Withdrawals From the Savings Pot 

These rules apply to preservation funds as well as other retirement savings products. You are able to do one withdrawal per annum from your savings pot. However, this withdrawal is subject to certain conditions. You will need to withdraw a minimum amount of R2000. You will also need to pay an administration fee of R300, excluding VAT.  

All withdrawals from the savings pot are then taxed at your marginal tax rate. It’s important to also ensure that you are up to date with all of your tax submissions and payments to SARS, as any outstanding monies due to SARS will also be deducted from the final amount you receive. Here is a useful calculator to help you with your Two-Pot Retirement System Calculations. 

It’s important that you are careful with your hard-earned money and don’t make unnecessary withdrawals from your savings pot. The savings pot should rather be seen as an emergency fund from which you withdraw only if it is absolutely necessary. It is advised to rather keep your funds preserved and allow them to grow, taking advantage of compound interest. Withdrawing from your savings pot will have a negative impact on your long-term retirement savings, maximising which should be your ultimate goal.  

Seeding the Savings Pot 

You are able to transfer 10% and up to a maximum of R30 000 from your vested pot to your savings pot. The rationale behind this is to allow members who have already been contributing to preservation funds prior to September 2024 to be able to access some of these accumulated funds. 

There are some important considerations to bear in mind if you are 55 years or older. You would have automatically opted out of the Two-Pot Retirement system if you were 55 years of age or older on the 1st of March 2021 and belonged to a preservation or provident fund. If you wanted to opt in, you would have had this option for one year, until the 1st of September 2025. You could then either contribute to the vested fund until you retire, or you could contribute to the Two-Pot System, but you would not then contribute to the vested portion. If you were age 55 or older on the 1 March 2021 and joined a preservation or pension fund, then you would have been opted in.  

Investors who had pension funds or retirement annuities would have been opted into the Two-Pot System regardless of their age.  Impact on Retirement Savings  The Two Pot Retirement System has been designed to encourage long term retirement savings amongst investors. By splitting funds up into the two pots and allowing members to access savings funds when needed for emergencies, there is less financial pressure put on members, as they know that they have access to funds in times of financial hardships.   

The National Treasury stated that the Two-Pot Retirement System provides “‘greater accessibility and flexibility, which could also encourage more savings into retirement”. The retirement pot will rather stay invested, grow and eventually provide for the member’s retirement years. Mandatory preservation of the retirement pot is likely to result in increased retirement savings. This is vitally important in South Africa, with statistics showing us that only 6% of South Africans can retire comfortably.  Accessing your retirement funds early on can have a profound impact on your retirement, and you want to make sure that you don’t tap into your retirement savings too early on in life.

Let’s look at some of the problems with accessing retirement funds too early:  

• You aren’t able to take advantage of the compounding effect. The compounding effect has a huge impact on your savings over time. The longer you leave your retirement savings invested, the more you can take advantage of the compounding of the growth and interest that you have earned on your investment, which can have a substantial impact on your savings capital. 
• You might not be able to meet your retirement goals if you withdraw your savings early. This could lead to greater financial stress as you approach the retirement years and are needing to put aside bigger sums of money for retirement. 
• You may end up needing to work longer than you had planned, in an effort to generate enough savings for your retirement years. 

It takes time to build up your retirement savings and there needs to be sufficient growth in the capital to mitigate against the effects of inflation and possible high fees that come with the investment and/or service provider. The longer the life span of your preservation fund or other retirement savings product, the more chance you have of it beating inflation and of the capital growing, especially if you have a diversified portfolio with a high percentage of equities.   

If possible, you also want to go with a service provider that has low fees, such as 10X. High fees compounded over the years will substantially deplete your retirement savings capital. With 10X, you are able to invest directly and, therefore, avoid the higher fees associated with financial advisors. At 10X Investments, we offer low fees of around 1% or less, depending on how much you have invested and the product you're invested in.  

There are no call centres at 10x, and our team members are experienced and willing to discuss any queries you may have related to preservation funds, other retirement savings products and the Two Pot System. We provide useful information through webinars, blogs, and calculators that cover living annuities, retirement planning, and portfolio management​. With the right tools, you can confidently take charge of your financial future without needing to rely on high-cost advisory services. 

In summary, the Two Pot Retirement System looks at dividing your retirement savings between the savings pot and the retirement pot. One-third of contributions will be invested in the savings pot, and two-thirds of contributions will be invested in the retirement pot. The savings pot allows you to withdraw a minimum amount of R2000 per year, which can be used for any emergencies that may occur. The retirement pot contributions will remain invested until retirement, so until at least age 55.  

As we’ve seen, preservation funds are impacted by the Two Pot Retirement System by partitioning the funds into two pots, although the rules don’t apply to contributions. It is still advised to keep funds invested as much as possible even though you have access to your savings pot. This new system aims to balance the need for immediate funds in case of emergencies as well as ensure that members are saving sufficiently for their retirement, which is vitally important for all South Africans. 

10x simplifies your retirement investments with low fees, a benchmark-beating track record and a straightforward investment approach. Reach out today to learn more about what we do.