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LEGAL NOTES Update: Impact of the Budget Speech 2023/2024 on Retirement Funds

On 22 February 2023 Finance Minister Enoch Godongwana delivered his budget speech. He noted that the 2023 budget is being tabled in a difficult domestic and global economic environment. Some of the more important implications to retirement funds are outlined below:

  • Two-Pot System

  • COFI Bill

  • Auto enrollment

  • Unclaimed Assets

  • Adjustments to tax tables (Retirement and Withdrawal)

  • Transfers between retirement funds by members who are 55 years or older

Two-pot system

Following public consultation, the first phase of legislative amendments to the retirement system is due to take effect on 1 March 2024. The intent of these amendments is to allow pre-retirement access to a portion of one’s retirement assets, while preserving the remainder for retirement.

Retirement fund contributions will remain deductible up to R350 000 per year or 27.5 per cent of taxable income per year – whichever is lower. Permissible withdrawals from funds accrued before 1 March 2024 will be taxed according to the lump sum tables. Withdrawals from the “savings pot” before retirement will be taxed at marginal rates. On retirement, any remaining amounts in the savings pot will be taxed according to the retirement lump sum table (for example, R550 000 as a tax-free lump sum on retirement).

National Treasury still to do additional work on the following:

  1. allocating a portion of the fund credit into the savings pot;

  2. treatment of defined benefit funds in an equitable manner;

  3. legacy retirement annuity funds; and

  4. withdrawals from the retirement pot on retrenchment where the individual has no alternative source of income.

The first three areas will be clarified in draft legislation still to be released. The fourth area will be reviewed at the second phase of implementation.

Conduct of Financial Institutions Bill (‘COFI’)

The National Treasury has revised the COFI bill based on feedback from stakeholders. The bill is expected to be tabled in Parliament in early 2023.

Auto-enrolment of retirement fund members

Not all employed South Africans belong to a retirement fund because currently it is not compulsory for employers to provide retirement fund benefits to their employees. The Minister of Finance indicated that during 2023, National Treasury will finalise policy proposals, on how to expand the participation and coverage of all formal and informal workers in a retirement fund, without excessively burdening their disposable income. They will also consider a voluntary and flexible savings scheme for informal workers.

Unclaimed assets

In September 2022, building on joint work with the National Treasury, the FSCA published a discussion paper on the nearly R90 billion of unclaimed assets across the financial sector. One recommendation it put forward is to establish a fund into which all unclaimed assets must be transferred and managed. An alternative recommendation it put forward is that unclaimed assets could be transferred into the National Revenue Fund for the same purpose. Further consultation on the FSCA recommendations will take place in 2023. A final paper will be published in 2024.

Changes to Retirement tax tables

The retirement tax tables for lump sums withdrawn at retirement and for lump sums withdrawn before retirement have increased by 10 per cent. See tables below:

Retirement Fund Lump Sum Withdrawal Benefits

The tax table for lump sums that become payable on a member’s withdrawal, ie resignation and dismissal from a retirement fund, will also be increased by 10%. This means that the tax-free amount that will become payable from 1 March 2023 will be increased from the current R25 000 to R27 500.

Retirement Fund Lump Sum Retirement Benefits or Severance benefits

The tax table for lump sums that become payable on a member’s retirement, retrenchment, and death from a retirement fund, will be increased by 10%. This means that the tax-free amount that will become payable from 1 March 2023 will be increased from R500 000 to R550 000.

Transfers between retirement funds

In 2022, changes were made to allow for tax-neutral transfers between retirement funds by members who are 55 years or older, who have reached normal retirement age and not yet opted to retire.

The definition of ‘normal retirement age’ in the Income Tax Act refers to ‘the date on which the member becomes entitled to retire’. This means that if a member’s employer-stipulated normal retirement age is 65, but they are entitled to go on early retirement from age 55, as provided for in the rules of the fund in which their employer participates and they are a member of, their ‘normal retirement age’ as defined in the Income Tax Act will be 55.

Our current tax laws allow for a tax-free transfer if a member transfers their withdrawal benefit before the ‘normal retirement age’ to a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund. A member who is over the early retirement age of 55 and who still contributes to their pension or provident fund, will only be able to do a tax-free transfer to a preservation fund or a retirement annuity fund, and not to a pension or provident fund, because their transfer would constitute a transfer on or after the

‘normal retirement age’ but before their retirement date, ie when they decide to retire from the fund. This could be seen as unfair, especially if, for example the employer decides to transfer from a stand-alone pension or provident fund to another pension or provident fund, such as an umbrella fund or when a section 197 transfer occurs, and the member is subject to an involuntary transfer.

To address this, the proposal is that these members must also be able to do a tax-free transfer to a pension or provident fund. An additional proposal is that the value of the transferred benefit, including any growth, will remain ring-fenced and preserved in the receiving pension or provident fund until the member chooses to retire from that fund. This means that these members will not be entitled to the payment of a withdrawal benefit for the transferred amount.

Concerns about the additional proposal is, if the two-pot retirement system is not implemented, this could be a problem because the member will still be able to take the benefit built up with the contributions in the new pension or provident fund as a withdrawal benefit until they reach the age of 65, but they will not have the same right to the transferred benefit. For example, if the member didn’t leave their pension fund, they would have been able to take a withdrawal benefit at any time before age 65.

Government proposal: members who have reached normal retirement age in terms of the rules of the fund but have not yet opted to retire, must (as part of the involuntary transfer) be able to transfer from a less restrictive to a more restrictive retirement fund without incurring a tax liability.

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