The Context
As South Africans, both employers and employees, we are all too aware of the following challenges.
- Increasingly people are not able to retire ‘comfortably’ with their current level of retirement savings
- Emergency financial requirements and stress to employees have often led to them leaving their employment simply to access their retirement savings.
WHAT IS THE 2-POT SYSTEM?
The legislation seeks to ensure that forms of retirement savings (pension funds, pension preservation funds, provident funds, provident preservation funds, retirement annuity funds); from 1 March 2023, will make contributions to:
- Retirement Pot: two-thirds (2/3)
- Savings Pot: one-third (1/3)
These contributions will continue to enjoy the existing tax treatment, namely, Tax Deductibility.
Existing cap rules will apply, namely, 27,5% of taxable income or R350 000. However, it should be noted that ANY contribution above the cap can ONLY flow to the retirement pot.
Those who were 55 or older on 1 March 2021 may still contribute to their provident funds. However, this only will apply up to retirement or exit from said provident fund.
COOKING UP A “RETIREMENT POT”
- Place 2/3 of retirement contribution in the pot and leave to cook on required “heat” (investment risk profile, investment costs and performances, and years to retirement age)
- Review annually to ensure that contributions are correctly allocated and performing as per risk profile, investment strategy and years to retirement.
- Leave to cook well and reduce “heat” within 3 – 5 years from retirement date
COOKING UP A “SAVINGS POT”
Ideally, this pot should be stirred as little as possible.
- 1/3 of retirement funding to be placed in a medium-sized pot. (for growth in funds)
- Place on low to medium heat (Due to ease of access and the need for capital retention)
- Review bi-annually. (Access can ONLY happen annually, provided there is a minimum of R2 000,00 in the pot)
Your role as the “master chef” is to ensure that;
- You appoint a competent, qualified financial advisor to ensure that the entire retirement “dish”, including “starters and dessert” is complementary,
- The presentation of the meals, i.e. financial needs during working life and retirement) is carefully executed and within your financial means and goals.
Finally, I believe that now more than ever, the role and value of financial planning and financial advice to companies and individuals is imperative.
Sources:
National Treasury: Media Statement Retirement Reform: Draft Legislation for the Two-Pot System. 31/07/2022
Author: Reynold Patrick King
Managing Director
Phoenix Employee Benefits (Pty) Ltd.
DISCLAIMER
This blog does not constitute financial advice. The content is intended to provide information for educational purposes. We recommend that interested parties contact Phoenix at the contact details listed or their financial advisors for a comprehensive review and needs analysis followed by the required record of advice.