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
Pension Options When You Leave a Job
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.
How many pension pots can you cash in? ›
For personal pensions, up to three pots worth up to £10,000 each can also be cashed in under the 'small pots' rules. As with trivial commutations, if you take lump sums under the 'small pots' rules, you must take the whole value from each pension pot at once – you cannot take it in stages.
Can you lose a vested pension? ›
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 happens when you cancel your retirement annuity? ›
If you cancel the policy before the maturity date (normally in the year you turn 55), the policy will be made "paid-up". You may incur an early termination charge (an accelerated recovery of upfront fees), although the closer you are to the maturity date, the lower this should be.
Is it better to resign or take early retirement? ›
Which One is Better. When considering retirement vs resignation, both possibilities involve leaving your job; however, there are some benefits you're entitled to get when you retire instead of resigning. If you've reached retirement age, the best option would be to retire instead of resigning.
Do you lose your government pension if you quit? ›
Department of the Navy, the Merit Systems Protection Board reiterated that “[r]etirement benefits earned over the course of one's federal career are generally available upon separation from federal service.” This axiom applies even when the agency initiates the separation.
What happens if you have multiple pension pots? ›
When you have multiple pension pots from various providers, you run a much higher risk of losing track of one or more of them altogether. House moves are notorious when it comes to paperwork getting lost, and if you misplace any, you may not be able to inform any pension providers that you've moved house.
Does cashing out pension count as income? ›
You have to pay income tax on your pension and on withdrawals from any tax-deferred investments—such as traditional IRAs, 401(k)s, 403(b)s and similar retirement plans, and tax-deferred annuities—in the year you take the money. The taxes that are due reduce the amount you have left to spend.
Is it better to take a lump sum or monthly pension? ›
While a pension annuity offers a fixed monthly income, a lump sum can be used for a range of purposes, including for unexpected medical expenses. If you die early, you can potentially receive more money than you would with regular payments. If invested carefully, a lump sum could also offer a passive income.
What is the 3 year rule for pensions? ›
Under the “Three-Year Rule,” amounts you receive are not taxed until your after-tax contributions are recovered.
If so, you only get to keep the employer contributions that had fully vested as of your last day. Your employer gets to take back any unvested contributions. If there was no vesting schedule — in other words, if 100% of employer contributions vested immediately — then it's all yours.
How do I know if I am fully vested in my pension? ›
How do I know when I'm vested and eligible to retire? We mail most members a postcard once these two requirements are met. In the meantime, your myCalPERS account estimates when you'll be eligible to retire. Your Annual Member Statement will tell you if you're eligible to retire.
Can you get all your money back from an annuity? ›
Money used to purchase an income annuity will be permanently locked into the contract, and it can be returned only in the form of income payments.
Can I take all my money out of an annuity? ›
Yes, you can withdraw all of your money from an annuity. Cashing out can result in consequences like taxes or penalties. These are determined by your age and annuity type. Whether you take partial or lump-sum withdrawals, remember to consider taxes, surrender charges and discounts rates.
How long does it take to cash out an annuity? ›
How long it takes to cash out an annuity depends on what type of annuity it is. In most cases, cashing out an annuity may require 30 days. If the annuity funds a structured settlement — and requires court approval to sell its payments — it may take up to 90 days or more to process.
Can I take out my retirement money if I quit my job? ›
Cash Out Your 401(k)
Nothing is stopping you from liquidating an old 401(k) and taking a lump-sum distribution, but most financial advisors caution strongly against it. It reduces your retirement savings unnecessarily, and on top of that, you will be taxed on the entire amount.
What happens to my retirement if I change jobs? ›
A direct 401(k) rollover gives you the option to transfer funds from your old plan directly into your new employer's 401(k) plan without incurring taxes or penalties. You can then work with your new employer's plan administrator to select how to allocate your savings into the new investment options.
Should I cash out my pension? ›
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.
Can you withdraw from your pension while still employed? ›
Collecting a pension while still working
Full pension payments while working: Some retirement plans let you start collecting a full pension at the retirement age defined by the plan, even if you continue to work for that company.
