By Doné Howell, Director
The retirement industry and members alike have long awaited further clarity from National Treasury on the ‘two-pot’ system, although probably from polar-opposite perspectives!
The thought of a run on the cash resources of the retirement industry must have made both National Treasury and industry actuaries rather nervous while we as members have eagerly awaited news on exactly how much we could withdraw and when!
The revised 2023 Draft Revenue Laws Amendment Bill and 2023 Draft Revenue Administration and Pension Laws Amendment Bill were issued for public comment on 9 June 2023, with 15 July as the closing date for submission of the comments. One hopes that largely all the niggles and concerns would have been addressed throughout the robust consultative process preceding these draft bills and that come 1 March 2024 we as members of pension, provident and retirement annuity funds (‘retirement funds’) can start enjoying the intended benefits.
What the intention of the ‘two-pot’ system really is
If National Treasury had a wish-list with respect to retirement savings for South Africans, it would simply be to preserve all your savings for your ‘old age’. This would allow you to be financially secure in your retirement years and not reliant on Government for financial aid.
But we find ourselves, as does the rest of the world, in a depressed economic climate, with high-inflation and an ever-increasing cost of living reality. Many South Africans are in dire need of financial assistance, resigning from their employment, a desperate act, as the only means of accessing their retirement savings.
It seems National Treasury with the proposed changes have compromised somewhat on their wish-list to allow for pre-retirement access to a portion of one’s retirement interest while preserving the remainder for retirement.
As member what is important for you to know about the ‘two-pot’ system
- Implementation date is 1 March 2024, a year later than initially thought do-able.
- Essentially, you can access one-third of your retirement interest before retirement age while preserving two-thirds for your retirement.
- Both employer and employee contributions to retirements funds are included (if the employer contribution was taxed as a taxable benefit).
- You can still claim a tax deduction in respect of these contributions, namely the lesser of R350 000 or 27.5% of remuneration or taxable income.
- In reality we have 3 pots and not 2, namely the savings pot, the retirement pot and the vested pot.
- From 1 March 2024, one-third of your monthly contribution will be allocated to this pot.
- You can access this pot once per tax year (1 March to 28/29 February of succeeding year).
- This is on a fund per fund basis, therefore if you are a member of more than one fund you will be able to access each fund’s savings pot.
- There is no ‘means test’, therefore, no-one is permitted to enquire (nor judge!) the reason for your withdrawal.
- MIN amount = R2 000.
- MAX amount = full amount in the pot.
- On withdrawal, punitive tax rates will apply, e.g. the amount will be added to your other income and taxed at your marginal tax rate.
- Tax-free transfers can be made from this pot to your retirement pot:
- At retirement, the pot can be paid out to you as a cash lump sum; however, any prior withdrawal from this pot will reduce your cash balance.
- Alternatively, at retirement you can transfer all or part of this pot to your retirement pot.
- At death, your beneficiary can choose to take the amount in this pot as a cash lump sum or to transfer such amount to the retirement pot in order to purchase an annuity.
- You are allowed ‘seed capital’ to be transferred from the retirement fund to your savings pot which can be accessed immediately on implementation date of 1 March 2024. The ‘seed capital’ is up to 10% of your total vested pot valued at 29 February 2024; however, limited to R25 000.
- From 1 March 2024, two-thirds of your monthly contribution will be allocated to this pot.
- This pot creates the compulsory preservation until retirement.
- Therefore, you cannot access this pot in financial difficulties, even if you resign from employment.
- At retirement, preferential tax rates apply, e.g. currently the first R550 000 is tax-free and thereafter the less punitive lump sum table rates apply.
- You are obliged to buy an annuity (including a living annuity) with the full amount in this pot.
- If your retirement interest is less than R165 000 you will be allowed to take the amount as a cash lump sum. This is the current de minimis amount and is subject to change.
- Your existing retirement interest valued at 1 March 2024 will be put in this pot.
- The retirement fund must determine the value of your interest and maintain record of this and future growth thereon.
- All old rules apply, e.g.:
- You can access funds if you resign from your employment.
- You can make a once-off withdrawal before retirement from any preservation fund.
- At retirement: one-third can be taken as a cash lump sum while two-thirds must be used to purchase an annuity.
- Tax-free transfers can be made from this pot to your retirement pot: however, you cannot transfer such amount back.
- The following additional rules apply to members of provident funds who were 55 years and older on 1 March 2021:
- You can continue to contribute to your vested pot until you retire or leave the fund.
- Therefore, you don’t have to switch to the ‘two-pot’ system.
- If you do switch you cannot contribute to this vested pot. Your contributions will then, in line with the new ‘two-pot’ system, be split one-third into the savings pot and two-thirds into the retirement pot.
- With regard to ‘defined benefit funds’, in determining benefits afforded to members of this type of fund, reliance is not placed on a member’s contribution but rather on a defined formula. For these type of funds to work in the ‘two-pot’ system, such funds need to calculate the one-third contribution to the savings pot based on one-third of the member’s pensionable service increase and the two-thirds contribution to the retirement pot based on two-thirds of the member’s pensionable service increase with effect from 1 March 2024.
- With regard to ‘legacy retirement annuity funds’ (a newly defined term), the proposed changes make provision for the exemption of ‘legacy retirement annuity fund’ policies from the provisions of the ‘two-pot’ system, as the inclusion of the ‘legacy retirement annuity fund’ policies would require a re-design of these historically acquired policies.
- The proposed changes also deal with loans and guarantees to members by their employers and retirement funds in respect of home-loans. The proposals include capping the housing-loan or guarantee to a maximum of 65% of the member’s retirement interest, including his or her interest in the savings, retirement and vested pots. This in line with Regulation 28 of the Pension Fund Act, which limits housing-loans granted by retirement funds to a maximum of 65% of a retirement fund’s aggregate assets.
Cessation of South African tax residency
Where you have or intend to cease to be tax resident in South Africa, you will be able to access your retirement and vested pots before your actual retirement.
Current rules only allow you to access your retirement interest in retirement annuity funds and pension/provident preservation funds in the following instances:
- If you emigrated from South Africa as recognised by the South African Reserve Bank on or before 28 February 2021; or
- If you are not a tax resident for an uninterrupted period of three years or longer on or after 1 March 2021; or
- If you depart from South African at the expiry a working or visitor visa, as defined in the Immigration Act.
Closing thoughts on the tweaks
According to National Treasury, the second phase to this retirement savings reform will focus on withdrawals from the retirement pot in the situation where one is retrenched and has no alternative source of income.
With respect to National Treasury, I had thought as I’m sure many of ‘my fellow South Africans’ did, who struggled through those pre-COVID-global-economic-depression-times exasperated by the uncertain-unprecedented-COVID-reality and continue to struggle with the daily realities of the new normal, this should have been your first focus.
Whether the once-off R25 000 or the continued access to South Africans’ one-third savings pot is adequate to break the debt burden of members and whether they can survive a further 12-month delay before accessing such funds remains to be seen.
My final thought and hopefully typical of South African humour in challenging, if not all, times - I had tongue-in-cheek gasped at the thought last year with the publication of the initial proposals that the word ‘pot’ would find its way into tax statute…I am relieved to say that pot is out and ‘component’ is in!