Chapter 5. The Proposed ‘Two‐pot’ Retirement system
The ‘Two-pot’ retirement system proposed in Budget 2022 is a very necessary component of the retirement reforms that were initially introduced from 1 March 2016 and then taken a step further from 1 March 2021.
However, the draft amendments that introduced the ‘Two-pot’ retirement system in 2022 are complex and fraught with potential ‘unintended consequences’, and it is no surprise that Budget 2023 announced that the effective date of their introduction has been postponed from 1 March 2023 until 1 March 2024 (if not later?).
Note the sections that follow are full of dates that refer to ‘2023’. Because of the postponement for a year, these dates are not correct.
In other words, ‘2023’ can be replaced by ‘2024’.
Because of the beneficial value of pre-retirement preservation for retirement fund member, the background to these important changes is discussed in reasonable detail even though the project has been postponed.
The postponement could result in the 2022 draft proposals being changed before they are finally introduced, but one assumes that the principles discussed in the following sections will not be changed significantly.
5.1 Background
The discussion that follows in this section of the workbook makes use of the following terminology:
• “Retirement Fund” is a generic term for Pension, Provident and Retirement Annuity Funds
• “Retirement Interest” (‘RI’) is the accumulated value of all contributions made to the fund plus investment growth and less administration expenses
• “Vested Right” is the right, usually created by legislation, to expect a certain outcome.
Retirement Reforms have been in the spotlight for many years, going as far back as the Michael Katz Commission investigations at the start of the millennium.
Extensively researched, widely canvassed and in my opinion, handled with admirable transparency by National Treasury, these reforms will improve the quality of life of South African citizens in their later years.
Fundamental reforms to our retirement fund regime have been under investigation since 2012 starting with a series of technical papers that were published by National Treasury that discussed various ways in which to promote retirement savings.
South Africa has a number of different retirement fund vehicles available to individuals including pension funds, provident funds, retirement annuity funds, pension preservation funds and provident preservation funds.
The generic term “Retirement Funds” includes pension, provident and retirement annuity funds, and is used in this workbook to keep it short.
Prior to 1 March 2016, each of these types of Fund was subject to different taxation rules for contributions as well as for withdrawals. This led to the implementation of the following aspects of the retirement reforms:
1. From 1 March 2016:
The harmonisation of the tax calculation rules for contributions to funds.
2. From 1 March 2021:
The preservation of the Provident fund retirement interest at retirement by annuitising (i.e., paying monthly annuity payments) what was previously a single lumpsum pay-out.
However, one of the planned reforms that has not yet been implemented is pre-retirement preservation.
Retirement fund members can currently access their pension or provident fund retirement benefit in full when they cease employment, and they also have a once-off option to withdraw any amount out of their pension preservation funds or provident preservation funds.
Information from retirement fund administrators and SARS indicates that early withdrawals of the retirement interest are taking place (sometimes by resigning from employment), despite the high tax rates that are applied.
The discussion paper entitled Preservation, portability and governance for retirement funds which was published on 21 September 2012, and the paper entitled 2013 Retirement reform proposals for further consultation which was published on 27 February 2013, both included options to increase the level of pre-retirement preservation.
This background brings us to the Budget proposals of February 2022 and the introduction of draft legislation during 2022 to provide for pre-retirement preservation.
Budget 2022 Proposal
The discussion paper entitled ‘Encouraging South African Households to Save More for Retirement’ was published in December 2021.
It outlines a set of reforms to enable pre‐retirement access to a portion of one’s retirement assets – while ensuring that the remainder is preserved for retirement. Public comments on the tax treatment of contributions to the two pots are being reviewed in preparation for public workshops, to be followed by legislative amendments.
Media Statement 29 July 2022
The 2022 Draft Revenue Laws Amendment Bill issued on 29 July 2022 contains key amendments on retirement reform to move towards a “two-pot” retirement system. The intention of the amendments is to enable South Africans to save for non-retirement purposes (e.g. emergencies) via their retirement funds, whilst preserving more of their savings for retirement.
These amendments aim to encourage members to preserve their retirement savings by making it more flexible to accommodate unforeseen pressures that members face during the span of their working life. It makes it possible for workers not to resign from their employment merely to access their retirement funds and would have assisted members during a crisis like the COVID-19 pandemic, when many employees faced reduced salaries or were not paid at all during that time.
The legislative proposals follow an intensive process of consultations, where various risks, challenges and possible perverse outcomes were identified. These amendments are the culmination of several years of consultations and engagements that took place between National Treasury, Labour, and Business stakeholders, and reflects input received from the public after the release of the discussion paper Encouraging households to save more for retirement in December 2021.
The amendments are technically complex [Rob: You can say that again], as they attempt to fit a pre-retirement withdrawal scheme into existing retirement savings vehicles primarily designed to cater for long term savings.
Explanatory Memorandum – Reasons for change
There are two primary concerns with the current design of the retirement system.
1. The lack of preservation of retirement savings before retirement.
For pension funds and provident funds, this access is dependent on an employee terminating employment. Individuals can then access their funds, in full, when changing or leaving a job.
In some cases, it can create an incentive to leave their employment to gain access to those funds in the short-term, ceasing prematurely the prospects of maintaining preservation for a longer period (at least until such time normal retirement age is attained per fund rules).
2. Some households in financial distress have assets within their retirement fund(s) that are not accessible, even in case of emergencies.
This issue worsened since the COVID-19 pandemic, with numerous calls for financially distressed individuals to be given immediate access to their retirement funds to alleviate financial hardship.
On 15 December 2021, Government published a discussion document entitled Encouraging South Africans to save more for retirement, which proposed a new retirement fund regime that aims to address both concerns – this in the form of a so-called “Two-pot” retirement savings system.
Individuals can contribute to a “savings pot” which is accessible (without resigning from their job), and a “retirement pot” which must be preserved until retirement (or death).
The aim is to have a system that will allow resources to be available when needed, but that will increase the level of savings that are dedicated to retirement.
Explanatory Memorandum – Changes to the Tax rules
The new two-pot system seeks to retain the principle of exempting contributions and growth, while taxing withdrawals and benefits (EET).
The tax treatment for withdrawals will be amended, as the value of any withdrawals from the “savings pot” and annuity income from the “retirement pot” will be included in that year’s taxable income.
This will therefore require changes to the “gross income” definition contained in section 1(1) of the Act.
The EET principle is retained to ensure that the income is taxed only once.
• From an economic perspective, this is best achieved if the tax is levied when the funds are disposed for consumption.
• From a behavioural perspective, this principle supports prudent savings decisions by providing the deduction when savings decisions are taken.
• From a policy consistency perspective, retaining the EET-basis underscores the logic of the 2016 reforms, as it puts all retirement fund types on the same footing.
• This offers flexibility to fund members, with simplified options for transfers of funds based on fundamentals.
• From an administrative perspective, the complexity of valuing the growth of the interest is kept to a minimum, as the final combined value is included in taxable income.
The public comments that were submitted on the tax design also indicated that this principle garnered strong public support: of the 15 comments that indicated a preference among the options, only one preferred an alternative design.
The decision to include non-annuitised withdrawals (i.e. withdrawals from the “savings pot”) in taxable income, rather than taxation through the respective lump-sum tables is based on the following reasons:
• It restores the progressivity of the Personal Income Tax (PIT) system by levying the rates applicable to other incomes
• It restores equity within the withdrawal system by taking other income sources into account when levying tax.
This means that taxpayers with other sources of income do not face an artificially low tax rate for withdrawals, but also ensures that taxpayers with low incomes do not face an artificially high tax rate on “savings pot” withdrawals.
• It ensures that a taxpayer in income distress who makes an emergency withdrawal is charged at a rate that may well be lower than their previous tax rate, rather than an artificially high rate.
• It is simple, certain, and transparent.
• From a behavioural perspective the intent is to ensure that fair application of the tax system discourages unnecessary early withdrawals, to the extent possible.
From the public consultation process, there was an even support for retaining the status quo (i.e. retaining the lump-sum tables) and taxing withdrawals at normal rates. The latter is an effective increase in tax rates for these withdrawals, premised on the reasons outlined above.
Commentators in support of this outcome indicated that this was a fair outcome.
5.2 Aspects of the ‘Two-pot’ Retirement reforms
In line with the details included in the discussion document, government proposes the following changes in principle to the main areas of retirement administration to enable the new ‘two pot’ system:
Funds
The creation of a new “retirement pot” and a “savings pot” that can each receive retirement contributions is necessary. These pots can be housed within the current types of retirement funds (a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund).
All prior contributions and growth (i.e. retirement interest) will have to be valued at the date immediately prior to implementation, to enable vesting of rights at that point in time (proposed to be 28 February 2023).
Legislatively this will have to be achieved by retaining the definitions of the existing retirement fund types for contributions up to 28 February 2023, referred to colloquially in this note as the “vested pot”.
The “retirement pot” and “savings pot” will then be accumulated from 1 March 2023 (the proposed effective date), which means that there is no seeding finance into either pots.
To effect these changes, section 1(1) of the Act will include the following new definitions: “savings pot”, “retirement pot” and “vested pot”.
Withdrawals
Amounts contributed to the “retirement pot” cannot be accessed before retirement.
At retirement date, the total value must be paid in the form of an annuity (including a living annuity). The current minimum amount for purchasing an annuity (de minimus of R165 000) will apply to the retirement pot’. This will therefore require that a “retirement withdrawal benefit” be defined in section 1(1) of the Act.
Amounts contributed to the “savings pot” can be accessed at any stage but take note that only one withdrawal can be made during any twelve-month period. The minimum withdrawal amount is proposed to be R2 000. These withdrawals will be subject to the fund rules allowing them.
For example, if Person A makes a withdrawal on 21 March 2025, the next withdrawal can only be made on or after 22 March 2026.
Withdrawals from the “savings pot” will be added directly to normal taxable income in the year of withdrawal.
This will therefore require that a “savings withdrawal benefit” be defined in section 1(1) of the Act. Should an individual opt not to make a withdrawal within a specific twelve-month period, the funds available in the “savings pot” come the subsequent twelve-month period will be available for withdrawal.
Permissible withdrawals from the “vested pot” will be taxed according to the respective withdrawal tables.
Full withdrawals from the retirement, savings and vested pots can take place if an individual ceases to be tax resident for a period of at least 3 years, with the appropriate tax treatment based on the facts and circumstances of the case. In these instances:
• the “vested pot” will be taxed in accordance with the pre-1 March 2023 tax provisions,
• the “savings pot” will be included in gross income and
• the “retirement pot” will be taxed in accordance with the lumpsum withdrawal tables.
Any funds available in the “savings pot” at retirement or death can either be withdrawn in full or transferred to the “retirement pot”.
Where the member opts to withdraw funds from the “savings pot” as a lumpsum on retirement, the available balance will be taxable as a retirement lumpsum benefit subject to the retirement lumpsum table.
This could result in a tax-free withdrawal of up to R500 000 (R550 000 from 1 March 2023) upon retirement.
Contributions
This is where the rubber hits the road for payrolls and employer administration.
A maximum of one-third of the total contribution can go to the “savings pot”, with the remaining amount going to the “retirement pot”.
Given that the ratios contributed into the respective pots can vary per individual (subject to meeting the one-third and two-thirds contribution maximums and minimums), contributions not allocated to the “savings pot” should be allocated to the “retirement pot”.
Members of retirement funds can receive a deduction on contributions up to the lesser of 27.5% of gross remuneration or R350,000 per tax year.
Any contributions above the deductible amount will only flow to the “retirement pot” for any offsets against section 11F. As a result, contributions in excess of the allowable deduction will not be permitted into the “savings pot”.
Section 10C will therefore need to be amended to cater for annuities received from the “retirement pot”.
Investment growth within the “retirement pot” and the “savings pot” will follow the same tax treatment as other retirement funds (i.e. tax is deferred until it is withdrawn or paid out as annuity benefits).
No further contributions can be made to the “vested pot” from pension funds, provident funds or retirement annuity funds, except for members of provident funds who were 55 years or older on 1 March 2021, as they are able to contribute to those funds until they either leave the fund or retire.
Vested rights
The current provisions for contributions to pension funds, provident funds, pension preservation funds, provident preservation funds and retirement annuity funds will continue to apply for contributions and accumulated interest before the implementation date (1 March 2023) therefore vesting is allowed up to 28 February 2023, together with the associated growth of that total, for each existing member until their retirement.
As such, individuals who resign from their employment will be able to access the value of their pension fund or provident fund as at 1 March 2023, plus any growth on that amount. Members of preservation funds will still be able to utilise their once-off withdrawal on amounts (and growth) within those funds.
Transfers
Individuals cannot transfer amounts out of the “retirement pot” but can only transfer to another “retirement pot” tax free. Transfers can be made into the “retirement pot” tax free from any other pot.
No transfers can be made into the “savings pot”, unless they are from another “savings pot” and subject to fund rules.
It is proposed that “retirement pots” and “savings pots” cannot be split between funds (i.e. you cannot transfer a “savings pot” to another provider without also transferring the relevant “retirement pot” to that same provider).
Given that a member could opt that 0% of the contribution flows to the “savings pot”, the practical result is that a member may well only have a positive balance in the “retirement pot”.
Therefore, a “retirement pot” could conceivably be a stand-alone pot, but a “savings pot” cannot stand alone from a “retirement pot” or be located at a different provider.
Examples:
Person A is employed and has R200 000 in a provident fund at the time of implementation of these amendments on 1 March 2023. From 1 March 2023 onwards, one-third of their contributions are deposited into an “savings pot” and two-thirds of their contributions are deposited into the “retirement pot”.
• After two years, there is R20 000 in the “savings pot”, R40 000 in the “retirement pot’ and R220 000 in the “vested pot”. Person A faces some financial difficulties and can withdraw the R20 000 from their “savings pot” without resigning to gain access to their retirement funds. Any amounts withdrawn from the “savings pot” would be included in Person A’s taxable income.
No further withdrawals from the “savings pot” can be made for another year.
• After another two years, Person A has R25 000 in the “savings pot”, R100 000 in the two-thirds “retirement pot” and R250 000 in the “vested pot”. Person A resigns to join another company. On resignation, the one-third “savings pot” and the two-thirds “retirement pot” can either stay in the current fund or be transferred to another fund which has a “savings pot” and a “retirement pot”, potentially at their new employer.
The one-third “savings pot” would still be accessible at any time.
For the “vested pot”, Person A would have the following options:
o Withdraw the R250 000 vested right, although the amount would be subject to tax according to the withdrawal tax table
o Transfer the R250 000 to another “vested pot” within a provident preservation fund. The amount would remain eligible for a once-off withdrawal of up to the full value at any point before retirement. The transfer would not have any tax consequences, but any future withdrawal(s) would be treated as indicated directly above.
o Transfer the R250 000 to the “retirement pot” to consolidate retirement interest, which would forfeit the once-off withdrawal. The transfer will not have any tax consequences.
• After another 10 years, Person A has reached retirement age. There is R75 000 in the “savings pot” and R600 000 in the “retirement pot”. Person A retires and can either withdraw the R75 000 from the “savings pot” as cash (taxed through the retirement lumpsum tables) or transfer any remainder to the “retirement pot”. Upon retirement Person A is required to purchase an annuity with the balance in the “retirement pot”, which would amount to R600 000 upon retirement, in the absence of any transfers from the “savings pot” or “vested pot”.
5.3 Summary of the Two-Pot Retirement System
The following summarises the points of the Explanatory Memorandum that accompanies the draft Amendments.
Please note that due to the postponement of the amendments, ‘2023’ is replaced by ‘2024’ in the following.
Contributions
1. All prior contributions and growth (hereinafter ‘the vested pot’), will be valued up to 28 February 2023 and continue to operate under the existing rules. Permissible withdrawals from the ‘vested pot’ will therefore be taxed according to the lump sum withdrawal tables.
2. No further contributions can be made to the ‘vested pot’ from pension funds, provident funds, or retirement annuity funds, except for members of provident funds who were 55 years or older on 1 March 2021, as they are able to contribute to those funds until they either leave the fund or retire.
3. As from 1 March 2023, contributions and growth will be split into two pots, the ‘retirement pot’, and the ‘savings pot’.
4. The two pots will be housed in the current types of available retirement funds, be it a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund.
5. A maximum of one-third of the total contribution can go to the ‘savings pot’, with the remaining amount going to the ‘retirement pot’.
Given that the ratios contributed into the respective pots can vary per individual (subject to meeting the one-third and two-thirds contribution maximums and minimums), contributions not allocated to the ‘savings pot’ should be allocated to the ‘retirement pot’.
Withdrawals
6. Amounts contributed to the ‘retirement pot’ cannot be accessed before retirement. At retirement date, the total value must be paid in the form of an annuity (including a living annuity). The current minimum amount for purchasing an annuity (de minimus of R165 000) will apply to the ‘retirement pot’.
7. Amounts contributed to the ‘savings pot’ can be accessed without any conditions, but only one withdrawal can be made during any twelve-month period. The minimum withdrawal amount is proposed to be R2 000. These withdrawals will be subject to the fund rules allowing them.
8. Full withdrawals from the retirement, savings and vested pots can take place if an individual ceases to be tax resident for a period of at least 3 years, with the appropriate tax treatment based on the facts and circumstances of the case. In these instances, the ‘vested pot’ will be taxed in accordance with the pre-1 March 2023 tax provisions, the ‘savings pot’ will be included in gross income and the ‘retirement pot’ will be taxed in accordance with the lumpsum withdrawal tables.
9. Any funds available in the ‘savings pot’ at retirement or death can either be withdrawn in full or transferred to the ‘retirement pot’.
10. Where the member opts to withdraw funds from the ‘savings pot’ as a lumpsum on retirement, the available balance will be taxable as a retirement lumpsum benefit subject to the retirement lumpsum table. This could result in a tax-free withdrawal of up to R500 000 (R550 000 from 1 March 2023) upon retirement.
Tax Rules
11. Members of retirement funds can receive a deduction on contributions up to the lesser of 27.5% of gross remuneration or R350 000 per tax year.
12. Any contributions above the deductible amount will only flow to the ‘retirement pot’ for any offsets against section 11F. As a result, contributions in excess of the allowable deduction will not be permitted into the ‘savings pot’.
13. Investment growth within the ‘retirement pot’ and the ‘savings pot’ will follow the same treatment as other retirement funds (i.e. tax is deferred until it is withdrawn or paid out as annuity benefits).
14. Withdrawals from the ‘savings pot’ will be added to taxable income in the year of withdrawal.
15. Individuals who resign from their employment will be able to access the value of their ‘vested pot’ as established on 28 February 2023, plus any growth on that amount. Members of preservation funds will still be able to utilise their once-off withdrawal on amounts (and growth) within those funds.
16. Individuals cannot transfer amounts out of the ‘retirement pot’ but can only transfer to another ‘retirement pot’ tax free. Transfers can be made into the ‘retirement pot’ tax free from any other pot. No transfers can be made into the ‘savings pot’ unless they are from another ‘savings pot’.
17. It is proposed that ‘retirement pots’ and ‘savings pots’ cannot be split between funds (i.e., you cannot transfer a ‘savings pot’ to another provider without also transferring the relevant ‘retirement pot’ to that same provider).
18. A ‘retirement pot’ could conceivably be a stand-alone pot, but a ‘savings pot’ cannot stand alone from a ‘retirement pot’ or be located at a different provider.
5.4 Alternative View of the Two-pot System
The following article is reproduced with acknowledgement to Webber Wentzel who have done an excellent job of giving another view by focusing on 10 important aspects of the ‘two-pot’ retirement system.
1. No need to re-enrol: Existing members of funds do not have to re-enrol to access the two-pot system, as existing funds will be adapted to accommodate it. Each fund will review its rules to do so.
2. Contributions will remain deductible: Up to specified caps contributions will remain deductible, but any contributions that are more than 27.5% of taxable income or R350,000 a year can only flow into the “retirement pot”.
3. Vested pot valued immediately: All contributions and growth that are accumulated before 1 March 2023 (the “vested pot”) will have to be valued at the date immediately prior to implementation to enable the vesting of rights. The conditions that were attached to those contributions will remain in place.
4. Savings pot starts in March: The “savings pot” will start to be accumulated from 1 March 2023, together with the “retirement pot”.
5. Withdrawals taxable: Any amounts withdrawn from the savings pot will be included in the member’s taxable income for that tax year and taxed at the relevant marginal rate.
6. Withdrawal limit: Only one withdrawal from the savings pot can be made a year, at a minimum of R2,000. All, or part of the amount accumulated in the savings pot up to the allowable withdrawal date each year can be taken out.
7. Adding the pots together: On reaching retirement age, the member can add the savings pot to the retirement pot to purchase an annuity or can withdraw the full amount in the savings pot as cash, which will be taxed according to the retirement lump sum tables. The lump sum tables have more favourable tax rates (maximum of 36%) relative to the marginal rate tables that apply to annual withdrawals pre-retirement from the savings pot (maximum of 45%).
8. Annuity purchase: On retirement, the total amount in the retirement pot must be used to purchase an annuity. The minimum amount that can be used to purchase an annuity is R165,000, amounts less than R165,000 in the retirement pot can be withdrawn as a lump sum.
9. Vested pot withdrawals: Before retirement, it is still possible for a member to withdraw funds from the vested pot, and, this withdrawal will be taxed according to the retirement lump sum tables.
10. Transfers: Although no amounts can be transferred out of the retirement pot, transfers can be made into it from other pots (vesting, savings or retirement). No transfers can be made into the savings pot, unless from other savings pots. The retirement pot and the savings pot must be held in the same retirement fund (e.g., you cannot hold the savings pot in your old employer’s fund and the retirement pot in your new employer’s fund).
5.5 PAGSA Comments on the Draft ‘Two-pot’ Requirements
At an early stage of the introduction of the ‘two-pot’ system in 2022, the PAGSA submitted comments to National Treasury from a payroll processing perspective expressing our concerns regarding the administration in payrolls of the draft requirements as they were proposed.
It is important to mention that the retirement funds will take the brunt of these changes, and they submitted a steady stream of comments to Treasury and SARS during 2022.
These comments no doubt led to the decision to postpone until 1 March 2024.
The PAGSA’s comments are focused on anticipated payroll processing difficulties and are summarised below.
Problem Statement – Allocation of the Excess of the total Contribution to the ‘Retirement pot’
The member of the fund can decide on the proportion of his or her total monthly contribution that must be allocated to the retirement and to the savings pot, subject to a maximum of one-third of the total contribution going to the “savings pot” and the remaining amount going to the “retirement pot”.
These ratios can vary per member (employee), and it appears that they can be changed by the member (employee) at any stage during the tax year, and that more than one change can be made during the tax year.
Tax Certificate reporting
1. Will there be separate tax certificate codes for contributions to the ‘savings pot’ and the ‘retirement pot’ for provident, pension, and retirement annuity funds for both the employee and employer?
2. How must the contributions be reported if the employee is a member of more than retirement fund?
Problem Statement – Allocation of the Excess of the total contribution to the ‘Retirement pot’
Employees can be members of more than one retirement fund (eg. a Provident fund and a Retirement Annuity fund) and both of the employee’s funds are processed in the payroll.
Our understanding is that the total contribution to both of these funds will be subject to the tax deduction limits of section 11F (the lesser of 27.5% of gross remuneration or R350,000 per tax year) for PAYE calculation purposes, and that any excess contribution above the deduction limit must be allocated to the “retirement pot” and not to the “savings pot”.
In this scenario, both the Provident fund and the Retirement Annuity fund have a “retirement pot”.
The question is:
How, and by whom, will the excess of the total contribution be allocated to the “retirement pots” of the two funds?
Problem Statement – Effective date
In our opinion, the complexity of the changes and the potential for ‘unintended consequences’ indicates that it would be advisable to postpone the proposed effective date of 1 March 2023 for at least one year.
5.6 Budget 2023 – Two-pot retirement system
On page 50 of Chapter 4 of the 2023 Budget the delay is confirmed as follows.
Following extensive public consultation, the first phase of legislative amendments to the retirement system is due to take effect on 1 March 2024.
The intent of these amendments is to enable pre-retirement access to a portion of one’s retirement assets, while preserving the remainder for retirement.
Retirement fund contributions will remain deductible up to R350 000 per year or 27.5 per cent of taxable income per year – whichever is lower.
Permissible withdrawals from funds accrued before 1 March 2024 will be taxed according to the lump sum tables.
Withdrawals from the “savings pot” before retirement will be taxed at marginal rates.
On retirement, any remaining amounts in the savings pot will be taxed according to the retirement lump sum table (for example, R550 000 is a tax-free lump sum on retirement).
Four areas required additional work:
1. A proposal for seed capital,
2. Legislative mechanisms to include defined benefit funds in an equitable manner,
3. Legacy retirement annuity funds
4. Withdrawals from the retirement portion if one is retrenched and has no alternative source of income.
The first three matters will be clarified in forthcoming draft legislation.
The final matter will be reviewed as a second phase of implementation.
5.7 Comments on the Budget 2023 Postponement
As a closure to the discussion in this workbook, it is perhaps of interest to include the following comments on the postponement of the ‘Two-pot’ system that were posted in the financial media after the 2023 Budget presentation.
[Rob: Incidentally, I hope that with the revised amendments that they find another name for this project. ‘Two-pot’ system sounds like packing for a camping trip …].
COMMENTS START
In a country where many face increased financial instability in retirement due to a lack of savings, government’s proposed ‘two-pot retirement system’ remains earmarked for implementation from 1 March 2024.
The system will allow you to access a portion (30%) of your retirement savings for emergencies, while ringfencing the remainder (70%) for your retirement.
However, while draft legislation around this was widely expected to be released today, this did not happen. Instead, the Budget Review makes vague reference to “forthcoming draft legislation” later this year.
Retirement reform executive at Old Mutual Michelle Acton says that although the industry is doing all it can to prepare for implementation, (companies) cannot undertake any work on system development until the reforms are passed into law. She adds that the amount of work needed to ensure readiness is far-reaching, as entirely new and sophisticated automated systems will have to be developed to enable fund members to efficiently access the allowed accessible portion of their savings.
Old Mutual estimates that the new level of accessibility will lead to a 300-400% increase in claims to be processed by administrators. The new two-pot system would have to allow for member-initiated claim functionality because, for the first time, members will have to register their claims without going through their employer. This is likely to require member engagement through an automated digital platform; the retraining and capacitating of entire new call centres; fraud and risk prevention measures.
“The administrative changes will be the biggest ever seen in the retirement industry in South Africa and means the need for an entirely new processing and service model. We will have to build a brand-new system overlayed on the existing system. This will take a massive amount of budget and resources which requires at least 12 to 18 months to build,” Acton says.
Finance minister Enoch Godongwana flagged four areas of retirement reform that needed “additional work” — a proposal for seed capital, legislative mechanisms to include defined benefits funds in an equitable manner, legacy retirement annuity funds and withdrawals from the ringfenced retirement savings if you are retrenched and have no alternative income.
Blessing Utete, managing executive of Old Mutual Corporate Consultants says the seeding relates to a portion of current savings being used to seed the accessible savings pot up to a regulated capped amount. “The Minister would have to provide specific details on how this would work to ensure the stability of funds and protection of member retirement funds and protection of member retirement fund outcomes,” Utete says.
Withdrawals tax — two-pot system
Withdrawals of any funds saved before 1 March 2024 will be taxed according to the retirement lump sum withdrawal tables. After 1 March 2024, any withdrawals from your “savings pot” will be taxed at marginal rates or the same rate at which you pay personal income tax.
So, if your tax rate is 40%, you will pay a 40% tax on whatever you withdraw from your “savings pot”.
It’s another disincentive, which is great and is likely to make retirement fund members think twice before making that withdrawal. When you retire, any remaining amounts in your “savings pot” will be taxed according to the retirement lump sum table where you can access a lump sum of up to R550 000 tax-free.
Retirement fund contributions will remain deductible up to R350,000 or 27.5% of your taxable income a year, whichever is lower.
Withdrawals tax – 2023 inflation adjustments
The tax brackets for retirement fund lump sum benefits, and lump sum withdrawals have been adjusted upwards by 10% to compensate for inflation. This means that when you retire, the first R550,000 lump sum you withdraw from your benefits will be tax-free (up from R500,000).
If you choose to make an early lump sum withdrawal before you retire, the initial tax-free amount is R27,500 (previously R25,000).
COMMENTS END