...or should it be called the Three-Pot Retirement System?
In July 2022, Finance Minister Enoch Godongwana published the draft Revenue Laws Amendment Bill, 2022 (“the Bill”) which proposed significant changes to the accessibility of regulated retirement savings prior to reaching retirement age (“retirement”) - and without, where applicable, requiring resignation, retrenchment, or dismissal - by introducing the compulsory Two-Pot Retirement System (“the System,” “this System”). In the 2023 Budget Speech, it was announced that National Treasury would press forward with the System’s launch, with an expected effective date of 1 March 2024 – a deadline Old Mutual believes will be easily missed if the required reforms are not finalised within the first half of 2023.
The System involves establishing two pots - a Savings Pot and a Retirement Pot, with a third, “hidden” pot known as the Vested Pot - and will apply to Pension Funds, Provident Funds, Pension Preservation Funds, Provident Preservation Funds and Retirement Annuities (“Retirement Funds,” “the Fund(s)”). Under this System, investors in Retirement Funds (“Fund Members,” “the Member(s)”) will be able to withdraw from the Savings Pot, with the Retirement Pot remaining generally inaccessible until retirement. The final pot, the Vested Pot, is only applicable to Retirement Funds established prior to 1 March 2024; with the Retirement Fund value available immediately prior to this date being placed in this Pot to be regulated in line with current rules.
No contributions may be made to the Vested Pot on or after 1 March 2024, except in the case of Provident Fund Members who were 55 years or older on 1 March 2021 and irrevocably elect out of the Two-Pot Retirement System. In this instance, their pension benefit regime will remain unchanged despite the introduction of the new System. Those Provident Fund Members who were 55 years or older on 1 March 2021 who irrevocably elect to participate in the System will not be able to contribute to the Vested Pot on or after 1 March 2024 and will be required to select a new product with the Savings Pot feature. These Members will lose the ability to access 100% of their retirement savings in cash upon retirement but would continue to enjoy full access to the Vested Pot at that time.
One-third of a Fund Member’s total contributions must be allocated to the Savings Pot. As a concession to proposals made by Cosatu, Treasury announced that it would consider allowing Members to make a once-off transfer to their Savings Pot, from the vested benefits accumulated prior to 1 March 2024 (those funds intended for the Vested Pot) – a process being referred to as Seeding. This would be on strict condition that doing so would not have adverse liquidity implications for Retirement Funds.
The remaining two-thirds of a Fund Member’s total contributions must be allocated to the Retirement Pot. Non-deductible contributions will be offset against future years' taxable income, lump sum payments from the Vested Pot, or post-retirement annuity payments.
Fund Members will be entitled to withdraw no less than R2,000 (before tax and fees) at a time from the Savings Pot, limited to one withdrawal in any 12-month rolling period. These withdrawals will be included in a Member’s gross income and therefore, taxed at their marginal tax rate – closing the door to a tax arbitrage opportunity that the current withdrawal benefits taxation system would create. Members may elect at any time, to transfer the value of the Savings Pot to the Retirement Pot of the same Fund, or to the Savings Pot or Retirement Pot of another Fund. As mentioned, withdrawals from the Retirement Pot will not be permitted except in the event of a Member’s retrenchment, limited income-based withdrawals, subject to various conditions, will be allowed.
Any funds available in the Savings Pot at retirement or death of the Fund Member will either be paid out as a lump sum, or in the form of an annuity, or as an alternative, transferred to the Retirement Pot on a tax-neutral basis. The minimum withdrawal amount of R2,000 (before tax and fees) does not apply in this instance. Upon retirement, the lump sum from the Savings Pot will be taxed in accordance with the Retirement Lump Sum tax tables – creating a tax arbitrage opportunity for those Members who receive S11F deductions (as contemplated in terms of S11F of the Income Tax Act 58 of 1962) at higher effective tax rates than that of the current retirement lump sum benefits taxation system.
At retirement, the funds in the Retirement Pot must be used to purchase an annuity, subject to the minimum threshold amount required to purchase an annuity of R165,000 (“de minimus”).
For Preservation Funds, the structure of the Pension or Provident Fund from which the retirement interest is transferred will be mirrored by the Preservation Fund. This means that the option of a once-off withdrawal from a Preservation Fund will only be allowable from the Vested Pot portion in respect of contributions made to a Pension or Provident Fund before 1 March 2024 and the Fund’s subsequent transfer to a Preservation Fund. Members of Preservation Funds will be allowed to withdraw from the Savings Pot in respect of the one-third of contributions made to a Pension or Provident Fund after 1 March 2024, at any point after 1 March 2024 and after the Fund’s transfer to a Preservation Fund. A once-off withdrawal from the Retirement Pot in respect of the two-thirds of contributions made to a Pension or Provident Fund after 1 March 2024 and before the Fund’s subsequent transfer to a Preservation Fund will not be permissible.
Whilst this System will allow Fund Members greater flexibility by allowing limited but regular access to their retirement savings to help in times of financial strife, its implementation is expected to create an administrative burden on Retirement Funds. Retirement Funds will be required to update their rules to regulate the System, input more sophisticated software, train employees, and educate Fund Members. Further, greater direct engagement between Funds and Fund Members is expected as Pension and Provident Fund Members will no longer be limited to engaging with Funds through their employers and will be able to submit claims themselves. This is likely to increase the number of employees and other resources deployed by Retirement Funds. Fund Managers will be required to develop new investment strategies to cater for short-term liquidity requirements and Members may require further professional assistance with their tax returns. All of these additional requirements will come at a cost borne by Fund Members and once again, the cost of regulated retirement in South Africa rises.
For queries on the current rules, the new Two-Pot Retirement System, or alternative retirement options, contact Sarah Shaw on sshaw@realcap.co.za, Dean Murray on dmurray@realcap.co.za or Steve Doidge on sdoidge@realcap.co.za.
*All growth, whether positive or negative, will be included in the value of the Pot to which the growth relates.
Disclosure: changes to the aforementioned rules can be expected between now and the promulgation of the relevant legislation.
05 April 2023
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