National Treasury has amended its original proposals on the two-pot retirement system, taking public comments into account, including a later implementation date of 1 March 2025.
On 25 October 2023, South African Revenue Services (SARS) and National Treasury (NT) briefed the Standing Committee on Finance and the public on their responses to the public comments received on the two-pot retirement system as set out in the draft Revenue Laws Amendment Bill (RLAB). 84 organisations and 258 individuals had submitted comments on the draft RLAB, most of whom supported the reforms.
The two-pot retirement system represents a fundamental change to the existing retirement savings structure. The new two-pot system intends to allow members of retirement schemes the flexibility to access one-third of their savings before retirement while preserving the other two-thirds for retirement. In the new system, members of schemes will have three “pots”: vested (built up before the legislation becomes effective), savings and retirement.
The key changes to the draft RLAB proposals set out in the NT draft response documents are as follows:
- The implementation date of the two-pot system will be 1 March 2025 (originally 1 March 2024) because of the magnitude of the reforms and the necessity to ensure that the new system operates seamlessly. We believe that retirement fund administrators would welcome this move as there were many concerns that the initial date of 1 March 2024 would provide far too little time for the industry to have the necessary systems in place and to enable the required training of staff and members.
- The seeding capital, which is the portion of the vested pot that would be allocated to the savings component on the implementation date, has been changed to the lesser of 10% or ZAR 30 000 (previously 10% or ZAR 25 000), after criticism that it was too little. The revised RLAB will also clarify that for members younger than 55 on 1 March 2021, seeding capital should be taken equally from the pre-1 March 2021 vested and non-vested pots.
- Withdrawals from the savings pot may take place at any time from 1 March 2025 (and once in a tax year) and not on a staggered basis, as suggested by some industry commentators.
- Defined benefit funds who are unable to determine the one-third/two-third split will be able to use an alternative method of calculating the split, as long as the methodology is fair, equitable and approved by the FSCA.
- Costs and expenses to implement the new system will be deducted in line with existing practice.
- Group life and disability benefits will be allocated one-third / two-thirds from the savings and retirement pots.
- Features of the legacy retirement annuity funds which are exempted from implementing the two-pot system will be clarified.
- Also exempted will be funds with no active participating members (in liquidation, beneficiary funds, closed funds and dormant funds) and pensioners.
- NT has confirmed that no amendments to regulation 28 to the Pensions Fund Act (which sets limits for permitted investments by retirement funds) are necessary to accommodate the two-pot system.
- NT has also confirmed that the grandfathering provision under regulation 28 will be retained for these funds.
- Provident fund members older than 55 on 1 March 2021 will be automatically excluded from participating in the two-pot system and will have to opt-in if they wish to participate.
- In principle, section 37D deductions under the Pensions Funds Act will apply proportionately across all components.
- Current rules on section 37D deductions for divorce order settlements will continue to apply, allowing for both cash lump sum withdrawals and transfers.
- Members will be allowed full flexibility on intra-fund amounts transferred.
- NT confirmed that withdrawals from the savings pot will be taxed at marginal tax rates.
- The current system on the withdrawal of amounts from retirement funds when an individual ceases to be a tax resident will remain the same. Preservation fund members who have not exercised their right to withdraw may continue to do so. Savings component amounts will be accessible to the non-resident in the same manner as a resident. Retirement component amounts are accessible three years after the individual has ceased to be a tax resident.
- Taxation on pre-retirement withdrawals will be deducted by fund administrators in line with a directive from SARS. At retirement, a member can transfer any portion from the savings to the retirement component, which will be annuitized and attract normal tax on payout.
- The revised RLAB will only deal with rules to implement the new two-pot system and exclude amendments covered under the Conduct of Financial Institutions (CoFI) Bill.
We are pleased to note that NT has struck a balanced compromise, managing to accommodate a wide variety of stakeholder concerns and criticisms to the draft RLAB. We look forward to the revised RLAB.
