On 29 July, National Treasury released its draft legislation on the so-called two-pot retirement system. It highlighted that “the proposal does not include allowing immediate access to retirement funds, but rather moves to a system that can more adequately cater for emergencies in the future but should also increase preservation to improve retirement outcomes.”
This is what you need to know.
Two-pot retirement system
The draft legislation proposes splitting retirement contributions into two pots.
All pension funds, pension preservation funds, provident funds, provident preservation funds and retirement annuity funds would be required to allocate contributions from 1 March 2023 to a new “retirement pot” and a “savings pot”.
Up to one-third of contributions can flow to the savings pot, while the remainder should flow to the retirement pot. Contributions will remain deductible up to the specified caps, but any contributions more than 27.5% of taxable income or R350 000 p.a. can only flow into the retirement pot.
Listen to Maya discussing this topic with retirement reform expert Rowan Burger on the My Money, My Lifestyle podcast
The two-thirds retirement pot cannot be accessed until retirement. This is a mandatory preservation of two-thirds of your retirement funds and members will not be able to withdraw these funds on resignation or if retrenched.
At retirement date, the total value must be paid in the form of an annuity. The current minimum amount for purchasing an annuity (de minimus) of R167 500 will apply to the retirement pot.
This compulsory preservation does not apply to retirement funds accumulated prior to 1 March 2023.
Access to the savings pot will only apply to contributions made after implementation date. Members of retirement funds will be able to access their savings pot once every 12 months, with a minimum withdrawal of R2 000.
Any withdrawal will be taxed according to the individual’s tax rate. Any funds available in the savings pot at retirement or death can either be withdrawn in full, or transferred to the retirement pot.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 lump sum on retirement, the available balance will be taxable as a retirement lump sum subject to the retirement lump sum table.
The legislation will also apply to retirement annuities. Members of retirement annuities, who are often self-employed, have never been able access these funds prior to retirement – even if they were retrenched.
As with all retirement funds, one-third of any contributions made to the retirement annuity from 1 March 2023 would be allocated to a savings pot and be accessible prior to retirement.
Government Employees Pension Fund
The two-pot retirement system will apply to the Government Employees Pension fund, however the mechanisms will differ due to the nature of the GEPF which is a defined benefit fund. Trustees will need to confirm how the savings pot will work in practice. This could, for example, reduce the number of years of service.
It is important to note that this is draft legislation and is out for public comment. The financial industry has already indicated that the time frame of March 2023 may be optimistic as it requires significant changes to the administration platforms.
It is possible this will only come into effect the following year.
Any change to retirement fund legislation can only apply to future contributions under the principle of vested rights.
Vested rights means that no changes can be made retrospectively. National Treasury describes the value of retirement funds prior to implementation of the changes as the “vested pot”.
While vested rights means you cannot have early access to your existing retirement funds in the vested pot, it also means that compulsory preservation will not apply to your existing retirement funds.
If you were retrenched, for example, after March 2023, you could still cash in your funds in the vested pot.
Have your say on the two-pot retirement system
If you would like to submit comments regarding the proposed legislation, you can forward written comments to the National Treasury’s tax policy depository at 2022AnnexCProp@treasury.gov.za and SARS at firstname.lastname@example.org by close of business on 29 August 2022.
Comments and queries on the proposed two-pot retirement system should also be sent to email@example.com.