Question: I read that a new “two-pot” system for retirement funds is coming into effect next year. Does this mean that I can take out a third of my retirement savings and clear my bond?

Answer: The short answer to your question is, no.

Let me go through what has been proposed. I will also run through the factors that you should take into account if you ever decide to withdraw money from your retirement fund.

Although the proposal talks about two pots, there are actually three, with the third one being the vested pot.

Vested pot

The vested pot consists of all the retirement savings that you will have made up until 28 February 2024. The current rules on that investment would largely still apply. This means that you cannot take out a third of your retirement savings before you retire.

The proposed two-pot system will come into effect on 1 March next year.

Retirement pot

This will consist of two-thirds of the retirement savings that you make from 1 March 2024. You will be able to access these funds only when you retire, any time from the age of 55. This means that, if you change jobs, you will not be able to access these funds as you can now.

I have found that, when changing jobs, many people use their pension fund money to clear short-term debt or do renovations. They often do not appreciate how much extra money needs to be invested in their retirement funds to make up for the money they have used. As a result, they often do not have enough to live on when they retire.

Many people look at their retirement savings and think they have enough because the amounts are large. However, when the money is converted into an income, you may find that it is not enough to support your desired lifestyle. 

A rule of thumb is that you need R1-million in retirement savings to fund a monthly income of R4,000 before tax. So if you want to live on R40,000 a month when you retire, you will need around R10-million in retirement savings.

Savings pot

A third of your retirement savings can go into a savings pot, from which you will be allowed to make annual withdrawals. I would recommend, however, that you exercise caution when considering withdrawing from your retirement savings. As you can see from the example above, there is a good chance that you will need a larger sum to retire on than you think.

At the moment, when you withdraw money from a retirement fund, a special tax table applies. Under the new regime, you’ll be taxed at your marginal rate. If your tax rate is above 27%, you are probably going to be in a worse position than you are now.

Retirement savings offer one of the best ways of providing tax-efficient capital growth to secure your future when you’re no longer working. You need to think very carefully before accessing these funds to deal with short-term issues. DM

Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to kenny.meiring@sfpadvice.co.za.

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R29.