The anticipated draft amendments to legislation that will implement the first phase of the two-component retirement system have been published for comment.
National Treasury published the draft Revenue Laws Amendment Bill and the draft Revenue Administration and Pension Laws Amendment Bill for comment on Friday, 9 June 2023 (Bills). These Bills will implement the first phase of the two-component retirement system with effect from 1 March 2024. For longstanding retirement fund members, there will effectively be three components: a vested, savings and retirement component. The same principle of taxation underlies the old and the new systems: contributions and build-up in the fund are tax-exempt, but withdrawals are taxed.
Below is our preliminary summary of the most important aspects of the proposed legislation. This is not an exhaustive summary, as the legislation is complex and detailed. We have also not discussed legacy retirement annuity funds, implications for emigrants, or when there is a divorce or on death.
The vested component (retirement savings before 1 March 2024)
This will include contributions made up to the implementation date, fund returns and any other credit amounts. An individual who was never a member of a retirement fund before 1 March 2024 will not have a vested component.
A provident fund member who was 55 or older on 1 March 2021 will be allowed a choice to, from 1 March 2024, (i) keep contributing to their vested component only (they will not have a savings or retirement component); or (ii) contribute to the savings or retirement components only (they will no longer be able to continue contributing to their vested components).
The savings component (one-third of contributions from 1 March 2024)
The seed capital for the savings component will be 10% of the vested component at 29 February 2024, to a maximum of ZAR 25 000. From 1 March 2024, one-third of retirement contributions will go into the savings component, which will be supplemented by fund returns and any other credits.
The retirement component (two-thirds of contributions from 1 March 2024)
This will be made up from two-thirds of retirement contributions after 1 March 2024, fund returns and any other credits. These funds cannot be accessed before retirement.
Transfers are only permitted if all components (vested, savings and retirement components) in a transferor fund are transferred into the same transferee fund.
Funds can be transferred tax free within the same fund (i) from the vested to the retirement component; or (ii) from the savings component to the retirement component.
A tax-free transfer can also be made from one fund to another fund (i) from the vested component to the vested component in another fund; (ii) from the savings component to the savings component of another fund; (iii) from the vested component to the retirement component of another fund; and (iv) from a savings component to the retirement component of another fund. This is subject to the rule that all three components must be transferred to the same transferee fund.
Generally, transfers from one fund to another fund are possible if a member retires or resigns from a fund and joins another.
Accessing the components
This is probably the area of most interest to retirement fund members. Emigrants wishing to access their retirement funds have further detailed rules which we have not discussed here. We have also not discussed access to the retirement funds on death of the member here.
The vested component can be accessed on termination of employment (including retrenchments), or upon retirement. Pre-retirement withdrawals are subject to tax using lump sum withdrawal benefit rates. At retirement, annuities are taxed at marginal rates, and lump sums at lump sum benefit rates. The vested component is not usually accessible while an individual is still employed.
The savings component can be accessed before retirement and without having to leave employment. A single withdrawal in a year of assessment is permitted, at a minimum of ZAR 2 000, which is taxable at marginal rates. The lump sum withdrawal of the savings component at retirement is subject to lump sum benefit rates.
Members who opt to take lump sum withdrawals from the savings pot need to be aware that their fund administrators will need to apply to SARS for a directive on the amount of tax that will be levied on this withdrawal. If the member is in arrears with their payments to SARS, SARS will issue a directive to the administrator to deduct the amount it is owed first, and only the remaining balance will be paid to the member.
The retirement component can only be accessed on retirement, and only in the form of an annuity (including a living annuity). A lump sum withdrawal is allowed if the total value of this component plus two-thirds of the vested component is less than ZAR 165 000. Annuity payments are subject to PAYE and taxed at marginal tax rates, while lump sum withdrawals where possible are taxed using lump sum benefit rates.
National Treasury will deal with withdrawals after retrenchment where members have no other form of income in Phase 2 of the implementation of this system. It wants to allow access to retirement savings only as a last resort.
When the member resigns from employment, the vested component in the employer fund may be withdrawn as a lump sum, subject to tax; transferred to a preservation fund; or transferred to the retirement component, thus forfeiting the once-off withdrawal. On resignation, the member may also choose to withdraw the full value in the savings component (if the one annual withdrawal was not used yet). If one annual withdrawal was already taken and less than ZAR 2 000 remains, they can withdraw all the remainder; or if one withdrawal was already used and the remaining balance is more than ZAR 2 000, they may only transfer the balance to the savings component of their new retirement fund (tax free) and withdraw the savings component next year. (Again, subject to the rule that all there components must be transferred to the same transferee fund).
When the member elects to retire, the rules for the vested component are the same as under the current regime. The savings component, on retirement, can be withdrawn as a lump sum or transferred to the retirement component. The retirement component can be preserved or used to purchase an annuity. Preservation at retirement is only possible if the member has reached normal retirement age under the fund rules but has elected not to retire.
Defined benefit funds
The Bills provide for equal treatment of defined benefit funds by proposing that the calculation of the one-third of contributions to be allocated to the savings component should be based on a member's pensionable service increase, as contemplated in the rules of that fund. The same calculation will apply to the remaining two-thirds, which will be allocated to the retirement component.
The two-component system, while welcome, will be complex to understand at first, and it has many implications. We would recommend that taxpayers take advice from a financial adviser for their individual situations before making any decisions.