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
Retirement pot
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.
Savings pot
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 Any funds available in the savings pot at retirement or death can either be withdrawn in full, or transferred to the retirement pot.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.
Retirement Annuities
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.
Implementation date
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.
Vested rights
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 acollins@sars.gov.za by close of business on 29 August 2022.
Comments and queries on the proposed two-pot retirement system should also be sent to retirement.reform@treasury.gov.za.
Will the savings pot invested like the retirement pot or will the one third sit in cash
This is a very important question, especially for those people who have no intention of withdrawing from their savings pot.
Because most people are likely to withdraw each year – despite the advice not to – funds may need to consider keeping these funds in low risk, cash-like investments.
However, for longer-term investors, if a third of your retirement investment is sitting in cash-like investments, your total return could be lower. This decision will be made at a fund level, and we are still waiting for retirement fund administrators to provide their options. Hopefully all funds will provide an option for the savings pot to be fully invested in longer-term type assets for those who do not wish to withdraw.
The other option is that you can transfer your savings pot to your retirement pot. It would then be fully invested, but the downside of this decision is that you would then not have a lump sum to withdraw at retirement as you can only take your lump sum from the savings pot. Hopefully we will have more insights later this year as to the options.
I would like to ask a question. Does the two pot also apply to paid retirement annuities. I was retrenched in December 2019 and have been unemployed ever since. So if this comes into effect will it apply to me?
Yes BUT – this is most likely only going to come into effect in 2025. So it is not likely to happen soon. There is also the issue of how much “seeding” you can do into the withdrawal portion. There is a discussion to allow some funds – around R25k – to be paid into the withdrawal pot on implementation but we are still waiting for details. Put it this way – you are not going to be able to access these funds for at least another two years and then it will be a limited amount.
Goodday
My only question is why meddle with something that is working. What is the agenda behind having the savings pot. Who at the end will benefit from this amendment’s on the long run.
I do not agree with these changes. I do not believe that it is in the best interest to the beneficiaries.
This will result in the pension fund (2/3 part) not growing to the benefit of the beneficiary as there is an lesser amount being deposited.
The 1/3 (savings) who will be the Executor and board members? Will this not be then an back door to use the funds by Government for what they see fit without the necessary permissions to be obtained as per the normal pension fund.
Currently our funds are safe but with these amendment the safety nets and red-tapes to access funds without knowledge or permission might be jeopardized.
We are still to see how GEPF will deal with this technically, however the “two-pot” system does not mean that the ‘savings” pot is managed separately. It is simply a mechanism to allow some access to funds prior to retirement. Currently, most people when they resign take the full pension value – this new system will include compulsory preservation of 2/3 which will greatly improve the financial outcome for most South Africans at retirement. You do not need to ever access the one-third and you can leave it to grow as part of your total pension fund so will have no impact on your final retirement benefit. But it is available for an emergency or major life event. This is a system that is used in other countries, including Singapore.
What will R2000 do to all the debts we have. It is so painful knowing that the Gorvernment doesn’t think for the people who are suffering out there due to the peanuts that we are getting monthly yet everything went up and the little you give us you tax it again. Ghis is day light Robbery straight. You guys earns millions every month but you busy oppressing us.
I support a proposed two pot system
Since not all government servants fall under GPEF for instance within the SAPS. There are those that fall under SALA. How is this system going to work for them?
All retirement funds would need to introduce a similar structure and these details would still need to be finalized. SALA has both a defined contribution and defined benefit fund option. For members of the defined contribution fund, it would probably be similar to the structure suggested by National Treasury in the document. For the defined benefit fund, they would need to assess how an early withdrawal would affect years of service.
This is all a scam. Why not let those who want to resign to just get their monies? This will not be beneficial to ordinary people because they can only withdraw savings from the implementation. This will take ages before the hardworking South Africans get to benefit from the system. Times are hard, just let people take their monies.
How will this impact my current provident fund. I want buy property next year and would like access a third of my money for a deposit. Currently the provident fund won’t allow it.
You definitely will not be able to access one-third of your existing pension value – only future contributions.
It is a good plan. We are earning less for years with no increase. Most of us apply for promotion but nothing. Why must the Government don’t allow us to have a portion of our pension so that we can close the debts we have. Remember we don’t take loans cause we want, it’s because of frustration. Everything is up, our salary do not have a value this days. I beg you Government, help us by allowing us use some of our money, I understand this will also help the economy. With all my humbleness.
I hereby object to the proposed amendments to the retirement changes.
It a great plan but it will encourage be dismissed but also encourage people to save money. so if you have R300 000 in your fund you can access R100 000.
We as working class are drowning in debts some even die without enjoying some of their money.