The Association for Savings and Investment South Africa (Asisa) says the tax regime for retirement savings should not be changed when the two-pot retirement system is introduced, but any changes should only be carefully considered at a later stage if the South African Revenue Service (Sars) finds that members are using it to derive an unfair tax advantage.
When National Treasury released its discussion document on the two-pot system in December last year, it posed a number of questions to be considered when the system is implemented, including the tax treatment of retirement savings in the accessible and preservation pots.
Asisa has not made its submission to Treasury public. However, Asisa senior policy adviser Rosemary Lightbody spoke to Moonstone about the organisation’s responses to some of the issues raised in the discussion document.
Lightbody emphasised that Asisa was very supportive of the proposed two-pot system, which, if implemented properly, would fundamentally improve outcomes at retirement.
She said one of Asisa’s members has calculated that even if a fund member withdrew the entire one-third from the accessible pot every year before retirement, the capital at retirement would be double what it is on average now, because the fund member would have been forced to preserve two-thirds of his or her savings.
Lightbody said implementing the two-pot system would require enormous changes by retirement funds and administrators that would take time to implement and bed down and changing the tax system would only introduce additional complexity.
It was important that fund members were given time to adapt to the two-pot system and develop their confidence in it, she said.
Members have expectations about how their retirement fund contributions and withdrawals will be treated, and it would be unhelpful to create uncertainty, particularly while members were getting used to the new system.
Tax breaks and punitive rates
One of the fundamental shifts in mind-set for members is that, from the date on which the system takes effect, they will not have access to the savings in the preservation pot.
It has been proposed that members will have vested rights to all the savings they have accumulated prior to the effective date, which means they will still be able to access those savings if they resign from their jobs.
Leaving the tax regime as it is means that fund members will qualify for a tax deduction on contributions of up to 27.5% (capped at R350 000) a year of the greater of their taxable income or remuneration. It also means that pre-retirement withdrawals, whether from the accessible pot or from vested savings, will be subject to the punitive tax rates.
Lightbody said retaining the existing tax rates on early withdrawals would act as a disincentive for non-preservation, even though Treasury has said that these tax rates have not prevented many members from cashing out.
If Sars finds that the fiscus is “being bled” by members who are getting a tax break on their contributions and making regular withdrawals from the accessible pot, then it could look at amendments to the tax regime, she said.
However, any changes to the tax system have to be carefully considered from the perspective of “the message” it sends and how it may impact on members’ behaviour over the long term.
Lightbody said Asisa’s members also believe that withdrawals from the accessible pot should be limited to one a year, and there should be a minimum withdrawal amount, to make withdrawals cost-effective for funds and administrators.
Asisa opposes asset transfer to accessible pot
Treasury’s discussion document also asked whether members should be permitted to seed their accessible pot with 10% of their accumulated savings, up to R25 000. This would effectively enable members to withdraw this money when the new system took effect.
Lightbody said Asisa did not think this proposal was a good idea for the following reasons:
- “A line in the sand should be drawn” when converting from one system to another. This will give members the certainty that savings accumulated before the effective date will continue to be treated according to the “old rules”, whereas “new money” will be subject to the “new rules”. Putting “old money” in the “new pot” and making it subject to the “new rules” will create confusion and a send a mixed message about the rationale for the reform.
- Funds, administrators and Sars would have to build systems to administer a one-off event. Many members belong to more than one fund, and all their savings would have to be aggregated to calculate the amount that each member could seed, and then the transfers would have to be processed. This would only serve to create additional bottlenecks when implementing the new system.
- The one-off ability suddenly to withdraw accumulated savings from the accessible pot would act as an incentive for members to take the money, whether or not they really needed it. (Remember, too, that pre-retirement withdrawals up to R25 000 are tax-free.) The rush to withdraw would also create administrative headaches.
One-third lump sum now or later?
The message that must be conveyed to fund members is that the two-pot system is designed to address the abysmal rates of preservation, not create the impression that retirement funds are alternative bank accounts, Lightbody said.
Members should understand that the one-third in the accessible pot is the one-third they can withdraw as a cash lump sum at retirement. The more of the one-third they withdraw before retirement, the less they will have at retirement, she said.
Members with accumulated savings before the effective date may also be able to take one-third of their vested funds as cash. But in the case of people who enter the retirement system from the effective date, the amount that can be taken as cash at retirement will depend entirely on what remains in the accessible pot.
Lightbody said it will take a lot of work to implement the two-pot system, and retirement trustees and members will have to be educated, while the staff of fund administrators will have to undergo training. All of this will take time. However, over the long term, the outcome for individuals and the country will be worth the effort.