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The proposed “two-pot system”

August 29, 2022

On 29 July 2022, National Treasury (NT) issued draft amendments to the previously proposed “two-pot system” legislation promoting the preservation of retirement funds, with consideration for members to access a portion of their savings while still employed and before retirement. The previous draft was published in 2021, with the additional amendments hoping to provide greater clarity on the initial proposal.

The intended implementation date is 1 March 2023. However, NT agrees with the notion that this is somewhat optimistic, considering the immense preparation required for such an overhaul to the existing pension fund system. This includes consultations with industry stakeholders, from retirement funds, administrators, fund managers, SARS (to all align their systems) and of utmost importance – the actual members. This inclusive exercise, therefore, deems the implementation date rather unlikely.

The call to access retirement savings whilst employed is long existing amongst fund members, despite the current and immense pressure that the value of accumulated assets are under in order to meet the need of most retirees. Even with the proposed changes, members have voiced their need for immediate access to their existing savings, but this has not been allowed. This would place the members’ retirement outcomes and the stability of the retirement fund industry in jeopardy.

The proposed system composes of “two-pots”, namely a “savings pot” and a “retirement pot”, where contributions post-implementation date will be split into one-third and two-thirds, respectively. It is from the savings pot that members will be allowed to take part or whole withdrawals, limited to one per annum of at least R2000 (to encourage long-term savings), without having to terminate their employment, and at the approval of fund trustees. This newly granted right will be subject to the marginal tax rates applicable to that member’s income, resulting in favourable tax rates for low-income earners. The amount will be deemed as taxable income for that specific tax year. The proposed changes will not apply to existing savings before the implementation date of 1 March 2023. These savings will be ring-fenced for the sustenance or preservation of the current legislation that governs them. It will be known as the “vested pot.”

The second component, which is the retirement pot – where two-thirds of contributions will be allocated, will remain inaccessible. This pot will be preserved, allowing no withdrawals prior to retirement. Members will be able to transfer to another retirement fund upon resignation, which will have to be in conjunction with the savings pot – as these may not be transferred separately. Upon retirement, it will be compulsory for the total value of this pot to be used to purchase an annuity to provide post-retirement income. The savings pot may be utilised to top up this purchase. A minimum amount of R165 000 will be required to purchase an annuity; anything less may be withdrawn as a lump-sum subject to the retirement tax tables applicable at the time.

As an example, in an instance where a member resigns to take up alternative employment and has accumulated savings in the new pots (retirement and savings), they will have the following options:

  • Transfer both pots to the new employer’s fund, maintaining the current split into the new fund, accessibility to the savings pot will not be forfeited in the process. These two pots remain separate when transferred into the new fund.
  • Keep the separate pots in the current fund with the initial employer.
  • Transfer to a retirement annuity (RA) in accordance with the current split, as is the case for institutional funds.

As for the vested pot concerning the same scenario, the member may:

  • Withdraw this portion, subject to the applicable withdrawal tax tables at the time.
  • Transfer to another vested pot within a preservation fund (pension or provident), with its vested rights carried along with it.
  • Transfer this portion to a retirement pot for consolidation of retirement interests, foregoing the right for a once-off withdrawal (allowed with preservation funds), again, with no tax consequences.
  • Transfer to a new employer’s fund, provided they have an existing vested pot.

In the case of retirement, a member:

  • May commute all monies in the savings pot, or transfer into the retirement pot for the purpose of purchasing a compulsory annuity.
  • May not commute monies in the retirement pot, as the entire content in the retirement pot will be obliged to purchase a compulsory annuity for post-retirement income.

As vested rights will be maintained, members will still be permitted to withdraw from this vested pot, subject to the retirement fund withdrawal tax tables – even post-implementation date, with the one-third, two-third rule applicable to pension funds at retirement, still applicable, as well as the de minimus rule that any capital below R247,500 can be withdrawn as a lump sum. With this proposed change in the industry, investment consultants will have to consider the most appropriate investment portfolios for each of these corresponding pots.

It is advisable that the concession to access these retirement savings should be a last resort to protect the financial well-being and maximise the savings of retirement fund capital to be utilised to purchase an annuity at retirement. All members are encouraged to consult a registered financial planner when considering whether to access funds from the “savings pot”.

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