The two-pot retirement system will come into effect on 1 March next year, according to draft legislation published for public comment by National Treasury on 31 July.
However, in an accompanying media release, Treasury said the proposed 2023 implementation date was optimistic, because retirement funds will have to change their rules and systems, and the South African Revenue Service (Sars) also needs to create capacity to cater for the new retirement pots and track withdrawals. Furthermore, retirement funds must train employees and educate fund members about the reform and its implication.
In terms of the 2022 Revenue Laws Amendment Bill, all pension funds, pension preservation funds, provident funds, provident preservation funds or retirement annuity funds will have to allocate contributions from 1 March 2023 to a new “retirement pot” and a “savings pot”.
These new pots will grow from the date of implementation, while a “vested pot” (contributions and growth that accumulated before 1 March 2023) will operate under the rules that were in place before the amendments took effect.
Treasury said that offering the savings pot will be subject to a fund’s rules, and members can opt out of the savings pot.
Up to one-third of contributions will flow into the savings pot, while the remainder will flow into the retirement pot.
Contributions will remain tax-deductible up to the specified caps, but any contributions of more than 27.5% of taxable income, or R350 000 a year, can flow into the retirement pot only.
Only members who were 55 or older on 1 March 2021 will still be able to contribute to their provident funds, but only until they leave the fund or retire.
The savings pot will accumulate from 1 March 2023, and the draft legislation does not accommodate calls for members to seed either their savings pot or their retirement pot.
Treasury said although there were many requests to grant members immediate access to their accumulated retirement funds, this would not be in the best interest of members or the stability of retirement funds, particularly when the value of the accumulated assets was already under pressure.
“These products were not designed to accommodate such a withdrawal, and it is members who will suffer if their retirement interest is diminished by large lump-sum withdrawals.”
Withdrawals from the savings pot
Members will be able to make a withdrawal from the savings pot once in any 12-month period without any conditions attached – in other words, they won’t have to quit their jobs. However, they must withdrawal at least R2 000.
All withdrawals from the savings pot will be included in a member’s taxable income and will be taxed at the member’s marginal tax rate, to ensure that all sources of income are taken into account to determine taxable income.
Members will not be able to access amounts contributed to the retirement pot before retirement.
At retirement, the total value must be paid in the form of an annuity. The current minimum amount for purchasing an annuity, R167 500, will apply to the retirement pot.
Any funds available in the savings pot at retirement or death can either be withdrawn in full or transferred to the retirement pot.
Where a member opts to withdraw funds from the savings pot as a lump sum on retirement, the available balance will be taxed according to the retirement lump sum table.
Vesting rights
All contributions and growth that accumulate before 1 March 2023 will have to be valued at the date immediately prior to the implementation of the two-pot system, to enable the vesting of members’ rights. The vested pot will continue to operate under the rules that were in place before the amendments.
Members will still be able to withdraw from the vested pot; however, such withdrawals will be taxed according to the pre-retirement lump sum table.
Restrictions on transfers
Transfers will remain tax-free. However, members cannot transfer amounts out of the retirement pot. They can transfer amounts into the retirement pot from other pots, or from one retirement pot to another retirement pot.
No transfers can be made into the savings pot, unless they are from another savings pot and subject to a fund’s rules.
Retirement pots and savings pots cannot be split between funds. In other words, a member cannot transfer a savings pot to another fund without transferring the relevant retirement pot to the same fund.
Members will be allowed to make a full withdrawal from their retirement, savings and vested pots if they cease to be a tax resident for at least three years, with “the appropriate tax treatment based on the facts and circumstances of the case”.
Comments on the draft legislation should be sent to National Treasury’s tax policy depository at 2022AnnexCProp@treasury.gov.za and to Sars at acollins@sars.gov.za by 29 August.
Click here to download the two-pot retirement system proposals in the 2022 Revenue Laws Amendment Bill.
There is something quite sinister about this proposal, which only becomes apparent on going through the Explanatory Memo example. It concerns vested rights and what happens to them when you change jobs. The example suggests the following options:
– withdrawal
– transfer to a preservation fund vested pot, where the benefit can be withdrawn under preservation fund rules
– leave it with the current employer’s fund, or transfer to the new employer’s fund, but in both cases, the vested benefit is then added to the retirement pot. There is no option to leave it in the vested pot of the current employer, to to transfer it to the vested pot of the new employer. Doing so means that those savings lose their vested status and can only be accessed at retirement, with the full amount amount subject to compulsory annuitisation.
For provident fund members, this means they lose
1. the right to take a 100% lump sum, or even just a one-third lump at retirement on their 28 Feb 2021 balance (plus subsequent) growth)
2. the right to the one-third lump sum retirement benefit on their second vested benefit on 28 Feb 2023.
3. the right of withdrawal on their first or second vested balance, on subsequent job changes
In that scenario, pension fund members also lose the right to the one-third lump sum at retirement on their vested benefit, or the right of withdrawal on subsequent job changes. .
I’m all in favor of higher preservation rates, but you cannot push it through the backdoor like this, hoping no one will see what you are doing until it is too late. Perhaps the example is just incomplete, but the wording under ‘vested rights’ and ‘transfers’ is sufficiently vague to suggest that it is not. Nowhere are these implication spelt out in detail, in what appears to be a deliberate omission, also known as a lie. It’s quite disgusting and hopefully will not stand.
Yes, for savers who want to remain invested, retain their tax benefits and their vested rights (regrading early access but also the lump sum benefit at retirement) moving to a preservation fund would be the only choice. However, under the new default regulations, the leaving employee’s accumulated savings stay in the fund of the current employer, unless they decide otherwise, so people can and will get caught out by this.
I don’t know how long you have to make this choice, to move to a preservation fund, and at what point the transfer from the vested pot to the retirement pot becomes permanent in this situation. This is something that Treasury needs to address in the final regulations/explanations.
It’s called the two-pot system, but as it stands, we are effectively dealing with a four or five pot system (provident fund members have two sets of vested rights). I get the sense that Treasury is aware of the long-term administrative burden of this on group schemes and wants to get rid of vested pots sooner rather than later, by adding them to the retirement pot or shifting them to preservation funds.
I haven’t seen the Explanatory memo myself, but from what Chris says above, it looks like provident fund members with vested rights who change jobs can transfer their vested funds to a provident preservation fund if they wish to retain their vested rights. This actually gives them a bit more flexibility as they can them make one withdrawal at ant time prior to retirement, so they can either withdraw immediately or later when they need the money.