As an older provident fund member, will I be included in the two-pot system?

Infographic:  As an older provident fund member, will I be included in the two-pot system?

EXAMPLE 1

Meet Sam
Sam is 58 years old
Sam earns R20 833 a month and he and his employer contribute 12.5% a month to his provident fund
Sam has R400 000 saved in the fund earning a 9% return a year

Sam is not included in the two-pot system.

Sam’s monthly contributions continue to go into Sam’s one retirement pot

Sam can take the maximum in cash or take only tax-free portion in cash and buy an annuity with the rest. Here are three options:

Sam can take the maximum in his vested and savings pots (R647 849 + R109 531 = R757 380) in cash or only take the tax-free portion (R550 000). He must buy an annuity with the balance in his retirement pot (R212 692)

Option 1 – take maximum in cash

R550 000 tax free¹

R366 074 cash after tax

R103 342 paid in tax

R916 073 total cash at retirement

Option 1 – take the maximum
in cas

R550 000 tax free¹

R170 052 cash after tax

R37 328 paid in tax

R720 052 total cash at retirement
R30 000 in withdrawals taken while working

PLUS: Retirement pot savings can be used to buy a pension (guaranteed annuity) starting at about R1 182 a month²

Option 2 – tax-free cash only and buy an annuity

R550 000 tax free¹ cash

Use balance of R469 416 to buy a guaranteed annuity starting at R2 608 a month for the rest of Sam’s life²

Option 2 – tax-free cash only and buy a guaranteed annuity

R550 000 tax free¹ cash

Use balance of R207 380 plus the R212 692 in the retirement pot to buy a pension (annuity) starting at about R2 334 a month²

Option 3 – tax-free cash only, invest in a living annuity and draw an income of 5%

R550 000 tax free¹ cash

Invest the balance of balance of R469 416 in a living annuity and draw an income of about R1 956 a month³  increasing each year at inflation or a little less

Option 3 – tax-free cash only, invest in a living annuity and draw an income of 5%

R550 000 tax free¹ cash

Invest the balance of R207 380 plus the R R212 692 in the retirement pot to invest in a living annuity and draw an income (annuity) starting at about R1 750 a month³ increasing each year at inflation or a little less

Assumptions

1. Sam has not taken any previous withdrawals from retirement savings
   
   
2. Sam uses a with-profit guaranteed annuity which provides an annual increase of 75-100% of the inflation rate and will provide Sam’s spouse with a pension equal to 50 percent of the annuity when Sam passes
   
   
3. Sam invests in an investment-linked living annuity earning a 9% return a year and draws an income of 5% of the capital
   
                         Calculations by: Natasha Huggett-Henchie, ASSA Retirement Matter Committee

EXAMPLE 2

Meet Sam
Sam is 58 years old
Sam earns R55 000 a month and he and his employer contribute 12.5% a month to his provident fund
Sam has R4 000 000 saved in the fund earning a 9% return a year

Sam is not included in the two-pot system.

Sam’s monthly contributions continue to go into Sam’s one retirement pot

Sam can take the maximum in cash or take only tax-free portion in cash and buy an annuity with the rest. Here are three options:

Sam can take the maximum in his vested and savings pots (R6 951 247 + R234 595 = R7 185 842) in cash or only take the tax-free portion. He must buy an annuity with the balance in his retirement pot (R561 507)

Option 1 – take maximum in cash

R550 000 tax free*

R4 941 713 cash after tax

R2 354 323 paid in tax

R5 491 713 total cash at retirement

Option 1 – take the maximum
in cash

R550 000 tax free*

R4 519 189 cash after tax

R2 116 653 paid in tax

R5 069 189 total cash at retirement

R60 000 in withdrawals taken while working

Option 2 – tax-free cash only and guaranteed annuity

R550 000 tax free* cash

Use balance of R7 296 036 to buy a guaranteed annuity starting at R40 533 a month and increasing each year for the rest of Sam’s life

Option 2 – tax-free cash only
and buy an annuity

R550 000 tax free* cash

Use balance plus retirement pot savings (R6 635 842 + R561 507 + R7 197 349) in retirement pot to buy a guaranteed annuity starting at R39 985 a month and increasing each year for the rest of Sam's life.  

Option 3 – tax-free cash only, invest in a living annuity and draw an income of 5%

R550 000 tax free¹ cash

Invest the balance of R7 296 036 to draw an income from the living annuity of about R30 400 per month.  

Option 3 – tax-free cash only, invest in a living annuity and draw an income of 5%

R550 000 tax free¹ cash

Invest the balance plus retirement pot savings (R6 635 842 + R561 507 + R7 197 349) in a living annuity to draw an income starting at R29 989 a month and increasing each year.

Assumptions

1. Sam has not taken any previous withdrawals from retirement savings.
   
   
2. Sam uses a with-profit guaranteed annuity which provides an annual increase of 75-100% of the inflation rate and will provide Sam’s spouse with a pension equal to 50 percent of the annuity when Sam passes.
   
   
3. Sam invests in an investment-linked living annuity earning a 9% return a year and draws an income of 5% of the capital.
   
                            Calculations by: Natasha Huggett-Henchie, ASSA Retirement Matters Committee