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The 'two-pot' system is only for future contributions, explains Maya Fisher-French.
National Treasury released its draft legislation on the so-called two-pot retirement system earlier this week.
It highlighted the following:
This is what you need to know.
TWO-POT SYSTEM
The two-pot system will see retirement contributions split into two “pots”. All pension funds, pension preservation funds, provident funds, provident preservation funds and retirement annuity funds will be required to allocate contributions from March 1 to a new “retirement pot” and a “savings pot”.
Up to a third of the contributions can flow to the savings pot, while the remainder should flow to the retirement pot. Contributions will remain deductible up to the specified caps, but any contributions more than 27.5% of taxable income or R350 000 per annum can only flow into the retirement pot.
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Retirement pot: The two-thirds retirement pot cannot be accessed until retirement. This is a mandatory preservation of two-thirds of your retirement funds and members will not be able to withdraw these funds on resignation or if retrenched.
At retirement, the total value must be paid in the form of an annuity.
The current minimum amount for purchasing an annuity (de minimus) of R167 500 will apply to the retirement pot. This compulsory preservation does not apply to retirement funds accumulated prior to March 1 next year.
Savings pot: Access to the savings pot will only apply to contributions made after the implementation date. Members of retirement funds will be able to access their savings pot once every 12 months, with a minimum withdrawal of R2 000.
Any withdrawal will be taxed according to the individual’s tax rate. Any funds available in the “savings pot” at retirement or death can either be withdrawn in full, or transferred to the “retirement pot”.
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Where the member opts to withdraw funds from the “savings pot” as a lump sum on retirement, the available balance will be taxable as a retirement lump sum subject to the retirement lump sum table.
Retirement annuities: The legislation will also apply to retirement annuities. Members of retirement annuities, who are often self-employed, have never been able access these funds prior to retirement. As with all retirement funds, one-third of any contributions made to the retirement annuity from March 1 next year will be allocated to a savings pot and be accessible prior to retirement.
Government employees: The two-pot system will apply to the Government Employees’ Pension Fund (GEPF). However, the mechanisms will differ due to the nature of the GEPF, which is a defined benefit fund.
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Trustees will need to confirm how the savings pot will work in practice. This could, for example, reduce the number of years of service.
Implementation date: It is important to note that this is draft legislation and out for public comment. The financial sector has already indicated that the time frame of March 1 may be optimistic, as it requires significant changes to the administration platforms. It is possible this will only come into effect in 2024.
VESTED RIGHTS
Any change to retirement fund legislation can only apply to future contributions under the principle of vested rights. Vested rights means that no changes can be made retrospectively.
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The Treasury describes the value of retirement funds prior to implementation of the changes as the “vested pot”. While vested rights means you cannot have early access to your existing retirement funds in the vested pot, it also means that compulsory preservation will not apply to your existing retirement funds. If you are retrenched, for example, after March next year, you could still cash in your funds in the vested pot.
HAVE YOUR SAY
If you would like to submit comments regarding the proposed legislation, send them to the Treasury’s tax policy depository at 2022AnnexCProp@treasury.gov.za or email the SA Revenue Service at acollins@sars.gov.za by close of business on August 29. Comments and queries on the proposed two-pot system should also be sent to retirement.reform@treasury.gov.za.
