After wide consultation, National Treasury and SARS have made some changes and clarifications to the original proposals on introducing a “two pot” retirement system.
On 29 July 2022, the 2022 Draft Revenue Laws Amendment Bill was released for public comment, setting out proposals for implementing a new “two pot” retirement fund system to provide more flexibility for members. The public comments period closed on 29 August, with National Treasury (Treasury) receiving written comments from 27 organisations and 80 individuals. There have also been workshops and discussions with the Standing Committee on Finance about these proposals.
Broadly, the plan in the draft bill is to create two “pots” for retirement fund members. From the date the new system comes into effect, members will be able to make one taxable withdrawal a year from their “savings pot” (one-third of contributions), but the “retirement pot” (the other two-thirds) has to be preserved until retirement and used to purchase an annuity. There is a third pot, the vested amount in the fund at implementation date.
Taking public comments into account, Treasury proposes to clarify and amend the draft bill on broader policy issues as follows:
- The implementation date will be postponed from 1 March 2023 to 1 March 2024, although this may still be optimistic in our view
- Members must contribute one-third to the savings pot, and do not have the ability to contribute less
- The 12-month period in which one withdrawal will be allowed will be a rolling 12 months
- The minimum withdrawal amount of ZAR 2 000 per rolling 12 month period is gross, not net
- Members exiting a fund with less than ZAR 2 000 in the savings pot will be allowed to withdraw that sum or ask for it to be transferred into their retirement pot.
- The ZAR 165 000 de minimis will apply on a cumulative basis to amounts that are subject to annuitisation, i.e. full withdrawal is possible if the total of (i) two thirds of the vested pot value; and (ii) value in the retirement pot, is less than ZAR 165 000
- Seed funding from implementation date into the savings pot is possible, with further consultation required on the risks and benefits of this approach, methods to minimise the adverse impact to liquidity, and possible trade-offs on vested rights.
- There will be more consultation with the public sector defined benefit funds stakeholders to explore how the new regime will affect these funds and their members, given that members' benefits are based on a defined formula, without reference to contributions and investment performance.
- Section 37D of the Pension Funds Act (relating to deductions for pension-backed housing loans, divorce settlements, etc) will have to be amended to cater for the two-pot system, and to provide that such deductions must be made from the vested and retirement pots.
- The two-pot system will be mandatory for all retirement funds, although Treasury is still considering a request to exempt certain legacy retirement annuity fund products.
- The scope and nature of charges levied on transfers from another fund and fund values will be clarified, as the draft bill provided for costs to be deducted from contributions, and fund values arising from transfers from another fund have no contributions by members.
- In the event of a member’s retrenchment, government will allow limited income-based withdrawals, subject to conditions, from the retirement pot.
On tax policy, Treasury responded to the comments as follows:
- The proposal in the draft bill to credit section 11F of the Income Tax Act (ITA) non-deductible contributions only to the retirement pot will be withdrawn
- Non-deductible contributions will be offset against future years' taxable income, lump sum payments from the vested pot or post-retirement annuity payments (via section 10C of the ITA)
- On death or retirement, the beneficiary or member will be able to choose between a lump sum or annuity payment from the savings pot. Any annuity payments would be taxed at marginal rates (max 45%) and a lump sum would be taxed using the lump sum tables (max 36%). On retirement, the member could also choose to transfer any remaining savings from the savings pot to the retirement pot on a tax-neutral basis.
- The draft bill will be amended to allow fund administrators to apply the relevant effective tax rates to withdrawals from the savings pot, including for taxpayers receiving more than one annuity stream. (This will be a similar regime to the paragraph 2(2B) of the Fourth Schedule of the ITA regime where administrators will receive a directive to withhold PAYE at the SARS calculated effective tax rate.)
- In the case of a taxpayer that chooses to emigrate, the three-year waiting period will not apply to withdrawals from the savings pot, although the rolling 12-month limitation and taxation at marginal rates will apply.
- Treasury also intends to rename the different pots (currently “savings”, “retirement” and “vested” in the draft bill) to avoid confusion, since what are referred to as "pots" in the draft bill are essentially components of the respective funds.
- Provident fund members who were 55 or older at 1 March 2021 will have the option to participate in the two-pot system. If they do, they will need to select a new product with the "savings pot" feature.
We anticipate that the Taxation Laws Amendment Bill 2022 and Tax Administration Laws Amendment Bill 2022 will be tabled on the same date as the Medium Term Budget Policy Statement on 26 October 2022. Due to the need for further consultations and policy changes, we anticipate that publication of a revised bill on the two pot system may be delayed to a further date.