Lump sum benefits explained

PENSION: HOW THE TAX-FREE LUMP SUM BENEFIT IS AFFECTED UNDER THE TWO-POT REGIME

- Liesl Peyper

With the two-pot retirement system effective for over a month, there is still uncertainty, especially regarding tax matters. One question fund members have been grappling with is how the tax-free lump sum benefit is affected under the two-pot regime.

Moneyweb asked two fund administrators to provide answers.

Three components

Jenny Gordon, head of technical advice, solutions, and enablement at Alexforbes, emphasises that the two-pot system in fact comprises three components, which for simplicity are called "pots":

> A vested pot containing the retirement savings up until 31 August 2024 (excluding the amount allocated to seed capital in the savings pot);

> A savings pot featuring one-third of contributions from which one withdrawal every tax year may be made (including the seed capital allocated on 1 September); and

> A two-thirds retirement pot that must be preserved and then annuitised upon retirement.

Under this "three-pot scenario", there are rules that apply to the vested pot and those that apply to the two new components of the two-pot system, Gordon says.

Vested pot rules