National Treasury issued the revised 2023 Draft Revenue Laws Amendment Bill and 2023 Draft Revenue Administration and Pension Laws Amendment Bill for public comment on the 9th June 2023. In this draft bill, the word ‘pots’ are amended to the word ‘components’ These draft bills include amendments to the necessary laws to enable the implementation of the first phase of the proposed two-pot system. The proposed effective date is 1 March 2024.
National Treasury envisages this new system as an exciting and significant enhancement to the South African retirement system, which is expected to improve retirement outcomes for members.
How the Two Pot System Works
From 1 March 2024 two-thirds (about 67%) of retirement fund contributions will be automatically allocated to a retirement component. These savings, and any investment growth, must be kept invested until retirement and used to buy a retirement income (must be annuitized/buy a pension) at retirement.
From 1 March 2024 one-third (about 33%) of retirement fund contributions will automatically be allocated to a savings component. These savings, and any investment growth, can be withdrawn once in an assessment year by members, provided the amount is not less than R2 000. They can do this without having to leave their job or retire. Members can also keep this invested and withdraw it or use it to buy a retirement income at retirement. Tax at marginal rates applies to any amounts withdrawn from the savings component.
Any amounts saved up to 1 March 2024, and any past or future investment growth, will be automatically allocated to a vested component.
Members of occupational retirement funds will still be able to withdraw these savings in cash if they leave their jobs or retire according to rules that apply before 1 March 2024.
For members of preservation funds the one withdrawal rule will still apply to these savings before retirement.
Members of retirement annuity funds will not be able to withdraw these savings before retirement, as they can only withdraw up to one-third at retirement.
Tax applies to all cash withdrawals from the vested component.
It has been proposed that members are provided with limited access to their retirement savings they have at 29 February 2024, without resigning from their employer. This is known as seed capital and is proposed to be limited to 10% of retirement savings at 29 February 2024 but limited to R25 000. This amount will be transferred to the savings component, so that the savings component starts with some savings for members to access. Tax will also apply to this amount if it is withdrawn.
Members who were 55 and older on 1 March 2023
Provident fund members who were 55 or older on 1 March 2021 will have the option to participate in the two-pot system. If these members do not participate in the new system, then all their contributions will be allocated to the vested component and they will then not have a savings component or retirement component.
Which Funds do the Two Pot System apply to?
The two-pot system will apply to all retirement funds, including defined contribution funds and defined benefit funds. It applies to umbrella funds, stand-alone funds, provident funds, pension funds, retirement annuity funds, provident preservation funds, pension preservation funds, and even unclaimed benefit funds. However, there will be an exemption for legacy retirement annuity funds.
Better outcomes for members
The two-pot system will increase retirement savings over the longer term and assist members to manage their more urgent financial needs. Based on certain assumptions, the two-pot system will improve members’ retirement outcomes by 2 to 2.5 times compared to the current system.
National Treasury has indicated that the second phase of the two-pot system will consider possible access to the retirement component if members are retrenched.
What members need to know
Members are encouraged to keep all their retirement savings invested for retirement. Withdrawing cash from retirement savings has a financial impact, including:
paying tax on any amount withdrawn
reducing the retirement income members will receive
reducing the cash amount that members will have available at retirement
For these reasons, it is important that members save for emergencies separately instead of relying on their savings component. The savings component should be a last resort once other options have been exhausted.
It is important to note that members will only be able to exercise their options once the changes become effective, which is proposed as 1 March 2024.
There is an extensive legislative process which still needs to unfold. The revised Revenue Laws Amendment Bill and amendments to the Pension Funds Act have only just been issued. The public will have an opportunity to respond to these updates. The deadline for this is 15 July 2023. It is possible that final legislation will only be available towards the end of 2023. The industry bodies and stakeholders are engaging with National Treasury, FSCA, SARS throughout the process.
Based on draft legislation, all stakeholders are preparing for significant changes by the effective date proposed as 1 March 2024 which includes: administration systems, processes, digital solutions and applications, member experience and communication, advice and guidance to trustees and management committees, advice and guidance to members, as well as legal and regulatory matters, including changes to various legislation including the Pension Funds Act, rule amendments, solutions and services.