By Zareena Camroodien – Departmental Head: Fund Governance and Trustee Conduct (FSCA)
The National Treasury (NT) is gearing up to introduce a significant change in the retirement industry through the implementation of the two-pot system for retirement fund savings. This system aims to strike a balance between the preservation of retirement savings and allowing members limited early access to a portion of the funds prior to retirement. As the implementation looms, it is important that the fundamental aspects of the system are clearly understood.
Background
The proposed two-pot system is an important retirement reform aimed at addressing essentially two challenges: the lack of preservation (pre-retirement leakage) and the lack of access to retirement fund savings (in cases of emergencies by members who are in financial distress but who have assets within retirement funds).
The access challenge became particularly more pronounced during the Covid-19 pandemic, with COSATU lobbying for members to have access to their retirement savings due to the dire financial position that they found themselves in.
During the February 2021 Budget Speech and November 2021 Medium Term Budget Policy Statement (MTBPS) Speech, the Minister of Finance made an announcement of this intended retirement reform; followed by a discussion document titled ‘Encouraging South African Households to save more for retirement’ published by the NT on 15 December 2021 for public comment.
An intensive consultation process between National Treasury, business and organised labour where various risks, challenges and consequences were discussed culminated in the policy reflected in the Revenue Laws Amendment Bill (RLAB) published on 29 July 2022 for comment. Once enacted, this bill will give effect to the two-pot system inclusive of:
- A Savings Pot (one third access pot): available in case of emergencies once a year, with a minimum withdrawal R2000 (subject to normal marginal tax rates)
- A Retirement Pot (two thirds compulsory preservation): available upon retirement to purchase annuity and subject to a minimum amount of R165 000. This was initially contemplated to have had application from 1 March 2023
- A Vested Pot: where vested rights or fund values (pre-1 March 2023) would not be impacted; and hence the creation of the third pot.
Post consultation amendments
Following comments received and engagements with various stakeholders, a second iteration of the RLAB was published on 9 June 2023 for comment. Key amendments contained in the RLAB 2023 to the two-pot system were as follows:
- Implementation date revised to 1 March 2024
- Provision for seeding: transferred from the vested pot to the savings pot with a maximum 10% of fund credit capped at R25 000
- Application to all funds including Defined Benefit and public sector funds
- Legacy Retirement Annuity Funds may be exempted
- ‘Pot’ renamed ‘component’
- Amendments to the Pension Funds Act (PFA) to give effect to two-component system: to be issued for public comment soon after the enactment of the RLAB
- Vested pot will be pre-1 March 2024 balances.
The third iteration of the RLAB which will be put before the Standing Committee on Finance (SCOF) on 1 November 2023 provides for:
- The seeding amount to be increased to max of 10% capped at R30 000
- Effective date will be from 1 March 2025
- Section 37D deductions to be applicable across all pots.
The SCOF rejected the 1 March 2025 effective date placed before it by National Treasury and proposed the effective date of 1 March 2024.
At the SCOF meeting held on 29 November 2023, it was advised that the effective date ought to be 1 March 2024, but National Treasury indicated that this would not be possible due to, inter alia, a number of entities not being ready and that the Pension Funds Amendment Bill (PFAB) may not be enacted by 1 March 2024. National Treasury proposed 1 September 2024 as a compromise in order for all stakeholders to be ready. On 1 December 2023, the Minister of Finance wrote to SCOF requesting 1 September 2024 as the proposed effective date, a request SCOF acceded to; the National Assembly shall thereafter vote on the Bill (RLAB).
On 29 November 2023, the Minister of Finance went to Cabinet to move the PFAB. Cabinet approved the tabling of the PFAB in Parliament.
Practical implications
Existing retirement fund members’ current fund credits from 29 February 2024 to 28 February 2025 will be excluded from the two-pot system. No further contributions may be made to this vested pot.
The current regime in effect before 1 September 2024 will apply in respect of the vested pot. For example, this means that on termination of employment before retirement, members will still be allowed to receive that vested benefit in cash.
Effective 1 September 2024, all contributions flowing into retirement funds (pension funds, provident funds, preservation funds or retirement annuity funds) must be allocated to two different pots; a retirement pot and a savings pot.
Provident Fund members who were 55 years or older on 1 March 2021 and who remained members of that fund until 1 September 2024 can choose to participate in the two-pot system or remain contributing members according to the pre -T-day (the day when a new tax regime for retirement funds is to be introduced). 1 March 2021 regime.
(i) Seed Capital Amount
The opening balance proposed by RLAB for the savings pot is to be 10% of the value of the member’s share in a retirement fund immediately before 1 September 2024, subject to a maximum of R30 000. However, the following members are excluded from this process:
- Unclaimed benefit members;
- Pensioners;
- Members with a pending claim status on 30 August 2024;
- Beneficiary fund members;
- Non-contributing members of terminating funds and funds in liquidation.
(ii) Savings Pot
A third of contributions after 1 September 2024 together with growth will go to the savings pot. Any part of this component, but not less than R2000, may be withdrawn once in any tax year. The full balance of this component may be withdrawn, but only once in any tax year, unless the amount in the savings component is less than R2 000. Tax will be at the marginal tax rates.
(iii) Retirement Pot
The retirement pot will not have any money in it to start with, two thirds of contributions from 1 September 2024 together with growth will go to the retirement pot. A member cannot make cash withdrawals from this component and cannot have access to this retirement component upon resignation from employment, rather the benefit will have to be preserved. The amount must be used to provide an annuity subject to the minimum amount. The annuity will be taxed as and when it is paid to the pensioner.
(iv) Transfers
Provision must be made for the transfer from a savings pot to the retirement pot and no transfers can be made into the savings pot for the seeding amount. Transfers between savings pots or retirement pots are permissible across funds, however, if the savings pot is transferred to a new fund, the retirement pot is to be transferred together with the savings pot. Members may transfer funds from the savings pot to the retirement pot. Transfers of vested pots are subject to current rules and will remain tax neutral.
(v) Section 37D Deductions
Once enacted as per RLAB, section 37D deductions are contemplated to be made across all pots. This requires system readiness. The FSCA will publish a communique containing principles to be contained in the rule amendments for submission to the FSCA. The FSCA contemplates large administrators or funds to submit draft rule amendments for in-principle approval, provided the rules submitted only deal with the two-pot system.
It is also important to note that communication to members remains key, as withdrawals will have a deleterious impact on members’ fund credits and is subject to tax. Therefore, administrators and funds should emphasise that withdrawals should only be made in case of emergency.
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