23 January 2024
The two-pot retirement system, which is currently expected to come into effect on 1 September 2024, will bring about major changes to the retirement landscape and the rules governing retirement funds. In this article, Palesa Mokoena, Technical Support Specialist at Glacier Business Development, specifically considers the access that members of defined contribution occupational retirement funds (pension and s) in the private sector, will have to their retirement savings when they resign from their employer under the new system. The details about the two-pot retirement system are based on our current understanding of the proposals in the 2023 Draft Amendment Bills. Some aspects may change prior to the finalisation of this legislation.
The current rules
Under the current rules, when a member of a pension or resigns from their employer, the member can opt to preserve their retirement savings in the employer fund as a paid-up member or in a preservation fund of their choice. Alternatively, the member can cash out the full value in the fund. Should a member choose to cash out the funds, such a withdrawal is taxed according to the withdrawal tax table with the first R27500 being taxed at 0%.
Historically, many members have chosen to withdraw from their funds upon resignation, with some even choosing to resign from their jobs just to access their savings in a provident or pension fund in times of hardship. These trends have contributed to the insufficient levels of retirement savings amongst the majority of South Africans at retirement. As a result, we now have the proposed government interventions, which are aimed at:
- addressing the issue of members depleting their retirement savings before retirement,
- providing members limited access to retirement savings before retirement without needing to resign, and
- encouraging long-term preservation.
The proposed new rules
Under the proposed system, the member’s options at resignation will change. From 1 September 2024, pension and provident members who resign from their employer will still be allowed to take the full value of their . Regarding the rest of their savings outside of the , at resignation they will only be allowed to withdraw the value of their if they have not already made a withdrawal from this component in the prevailing tax year or if the remaining value of this component is less than R2 000. Importantly, these members will not be able to withdraw any retirement savings that are in their at the time of resignation, as this component must be preserved until retirement. This means that going forward, members will no longer be able to cash out 100% of their pension/ savings at resignation.
Any resignation withdrawal from the will be taxed according to the withdrawal tax table, whereas any resignation withdrawal from the will be taxed at the member’s marginal income tax rate.
What to consider before cashing out at resignation.
Below are some answers to the questions members may have if they consider cashing out all the available funds from the and the at resignation:
- Why can’t I take all my retirement savings money when I leave my employer?
Under the two-pot retirement system a portion of your retirement savings linked to your contributions from 1 September 2024 will not be accessible until retirement. This portion will be preserved and will ensure that you will have some savings for retirement.
- What will happen to my remaining when I resign from my employer?
Subject to the Fund rules, members may be permitted to stay in the employer fund as a paid-up member and retain the remaining with the employer pension/ until retirement. Alternatively, a member can transfer their tax-free to a preservation fund of their choice.
- Will I be allowed to make a withdrawal from the if I transfer it to a preservation fund?
No, the retirement interest in the will only be accessible at retirement or upon emigration (three years after cessation of tax residency), disability or death.
- Will I be allowed to take a portion of the remaining in cash at retirement?
No, upon retirement the member will have to purchase a compulsory annuity with the full value of the unless the value falls below the legislated limit.
- How will the withdrawal I take at resignation impact the tax I have to pay on future retirement cash lump sums?
A withdrawal from the will be taken into consideration when calculating the tax on future retirement cash lump sums, as the retirement fund lump sum tax tables are subject to the principle of aggregation.
Any annual withdrawal or resignation withdrawal made from the will be taxed in that tax year at s; however, these withdrawals will not be considered for the principle of aggregation with regard to future retirement cash lump sums.
Resigning to get access to your retirement savings is a thing of the past.
The resignation rules under the two-pot retirement system present a major change for members of pension and s who have become accustomed to the current system which allows for full withdrawals each time they change jobs or leave their employer. Many members may not be familiar with the concept of preservation and the workings of preservation funds. Members who resign from their employer will therefore require financial education and support from their employers, funds and financial advisors in order to navigate their options under the two-pot retirement system, understand the implications for retirement savings and make an informed decision.
To read more about the two-pot retirement system and the latest retirement reform insights, you can visit the Glacier Insights Retirement Reform page.
Glacier Financial Solutions (Pty) Ltd is a licensed financial services provider.
Sanlam Life Insurance Ltd is a licensed life insurer, financial services and registered credit provider (NCRCP43).
FAQs
Under the two-pot retirement system a portion of your retirement savings linked to your contributions from 1 September 2024 will not be accessible until retirement. This portion will be preserved and will ensure that you will have some savings for retirement. Two-thirds of contributions from 1 September 2024.
What happens to your pension when you quit? ›
Typically, when you leave a job with a defined benefit pension, you have a few options. You can choose to take the money as a lump sum now or take the promise of regular payments in the future, also known as an annuity. You may even be able to get a combination of both.
Can a company take away your vested pension? ›
“Vesting” in a retirement plan means ownership. This means that each employee will vest, or own, a certain percentage of their account in the plan each year. An employee who is 100% vested in his or her account balance owns 100% of it and the employer cannot forfeit, or take it back, for any reason.
Can you withdraw from your retirement annuity? ›
When you retire and your RA (Retirement Annuity) matures, you can withdraw a maximum of 1/3 of it as a lump sum. We asked an expert what options you have with this lump-sum amount to secure your finances into retirement.
How can you lose your CalPERS pension? ›
state or federal trial court of any felony under the law for conduct arising out of or in the performance of his or her official duties, in pursuit of the office or appointment, or in connection with obtaining salary, disability, service retirement, or other benefits, must forfeit all accrued rights and benefits in any ...
Can I cash out my CalPERS retirement? ›
While you may have the ability to access some of your investments, such as a 401(k), this isn't possible for the funds in your CalPERS pension account. There is only one instance where you can access your CalPERS pension contributions — when you leave CalPERS employment.
What happens to my pension if I quit before vested? ›
If you leave before achieving five years of service credit and you don't meet any exceptions, you may be eligible for a refund. However, electing a refund terminates your CalPERS membership; if you decide to return to a CalPERS-covered employer later in life, your service credit vesting would start over.
Do you lose vested stock if you quit? ›
Companies usually tie earning equity to tenure (a process called vesting). In most cases, you have to stay for at least a year to vest any equity (your grant may call this a “one-year cliff”). When you leave, you are only entitled to the portion of that equity that has vested as of the date of your departure.
What happens if you quit before fully vested? ›
Your employer's contributions will eventually automatically become vested unless you quit your job or are laid off before the vesting schedule is complete. In these situations, any unvested money is forfeited and returned to the employer.
Does a pension withdrawal count as income? ›
If you receive retirement benefits in the form of pension or annuity payments from a qualified employer retirement plan, all or some portion of the amounts you receive may be taxable unless the payment is a qualified distribution from a designated Roth account.
2020–21, 2021-22 and 2022-23 income years (%)^
There are no maximum payment limits for account-based pensions. Under a Transition To Retirement (TTR) pension the maximum you can withdraw is 10% of the balance of your account when you commence your TTR pension or at the beginning of subsequent financial years.
Should I cash out my pension when I retire? ›
Studies show that retirees who cash out their pensions are less likely to maintain the same levels of financial stability after five years. 1 A monthly payment offers a steady income for the remainder of one's life, and in some cases can also be passed on to a spouse.
How do I avoid taxes on an annuity withdrawal? ›
To avoid paying taxes on your annuity, you may want to consider a Roth 401(k) or a Roth IRA as a funding source. Then, you do not pay taxes upon withdrawal since Roth accounts are funded with after-tax dollars.
Why can't I withdraw my retirement annuity? ›
Cash withdrawals are subject to tax. You retain this right if not used at the time you leave your retirement fund. You cannot make any withdrawals until such time as you leave your new employer. You cannot make any withdrawals until you retire (minimum retirement age is usually 55.)
How to get money out of an annuity without penalty? ›
Avoiding withdrawal penalties is quite simple: Just keep your money in the annuity until you retire. When you need the money in retirement—when the surrender period is over, and you're past 59½ years of age—you'll get a steady income, and you'll get it penalty-free.
What happens to your pension if you quit or get fired? ›
However, if you have a traditional pension plan that your employer is contributing money toward, your employer can take back that money in the event that you are fired. However, if you are vested in the pension, then all the money in the account is yours to keep, even if you quit or are fired.
What are three ways you could lose your pension? ›
A number of situations could put your pension at risk, including underfunding, mismanagement, bankruptcy, and legal exemptions.
How long does it take to be vested in pension? ›
The six-year graduated schedule allows workers to become 20% vested after two years and to vest at a rate of 20% each year thereafter until they are 100% vested after six years of service. Plans may have faster vesting schedules.
Should you leave a job with a pension? ›
If you have only contributed a few years to the pension, it might make sense to roll it into your new 401(k) since the monthly annuity amount would be minimal. But if you have a long 20-year career in government and have a pension, it might make more sense to keep the pension and get a monthly income in retirement.
