Tweaked two pot system likely to be delayed

It is likely that you will not get access to a portion of your retirement savings under the two-pot system until March 2025 as National Treasury has proposed a delay in the implementation date.

It also dealt with a number of other important issues raised in comments on the draft legislation for the new system at parliament’s Standing Committee on Finance meeting this week. One of these was to increase the maximum amount that members will transfer once-off from their current savings into the savings pot from which they can withdraw.

The two-pot system will split your future retirement fund contributions into two pots – one third will fund a savings pot from which you can withdraw once a year, while two thirds will be kept in a pot until your retirement. Your savings up to the date of implementation – apart from a small portion used to seed your savings pot - will be vested and you will have access to these on resignation as is currently the case.

Here are the five most important things to know about the latest proposals.

1.  Implementation likely to be delayed

The Association for Savings and Investment South Africa (ASISA) and the Institute of Retirement Funds Africa (IRFA) said in comments on the draft two-pot legislation that it was a major reform that funds and their administrators would need 12 to 18 months to implement.

Since the new system has been under discussion since 2020, some commentators questioned the need for so much time. ASISA and IRFA explained that the legislation needed to be finalised before administrators could make system changes. They also said once the law was finalised, every retirement fund would need to amend their rules and huge member education drives would be required.

National Treasury’s acting head of tax and financial sector policy at National Treasury Chris Axelson revealed this week that the South African Revenue Service also needed more time to be ready than the original March 2024 deadline allowed. It can also only begin changes when the legislation has been finalised.

Axelson said it was better to delay to March 2025, when everyone could be ready, so that there won't be mistakes and confusion amongst members that could undermine the confidence in the retirement industry.

Cosatu’s spokesperson and parliamentary coordinator Matthew Parks earlier made a strong case for workers to get access to their savings soon. He said they need the money to relieve debt, the high cost of living and job losses. This week he asked parliament to compromise by extending the implementation date by only a few months to June or September next year.

When updated legislation is tabled in November parliamentarians will have the final say on the implementation date.

2.  The amount you can access immediately

The draft legislation proposed that when the new system is implemented, retirement fund members be allowed to transfer 10% of their existing retirement savings up to R25 000 into the savings pot for immediate access. 

Cosatu argued this amount used to “seed” the savings pot was too low and should be increased to R50 000. In response, Treasury director of economic policy Alvinah Thela said this week that Treasury proposed increasing the maximum amount by inflation to R30 000. Treasury officials said they were mindful that increasing the amount too much would leave members with too little for retirement and create investment liquidity problems for retirement funds.

Parks this week asked for a compromise of R40 000. He said to wait another year to only be able to access a maximum of R30 000 would be a painful blow to workers and could result in more of them resigning to access their savings.

Commenting after the hearing Michelle Acton, retirement reform executive at Old Mutual, said the increased cap would have a minimal additional impact on pension fund liquidity.

3.  Tax on your withdrawals

Cosatu asked National Treasury to reconsider the proposal in the draft legislation to tax withdrawals from the savings pot at members’ marginal tax rates.  

When you contribute to a retirement fund you get a tax deduction for the amount you contribute at your marginal tax rate. The proposal is if you withdraw, you effectively lose that deduction by paying tax at your marginal rate on your withdrawal.

Treasury will not change this proposal as it believes it is progressive, equitable and in line with how other sources of income are taxed, Marle van Niekerk, director of personal income tax at Treasury, said.

Marginal tax rates are transparent and simple to apply, she says.

Treasury also clarified that under the new system, SARS should provide guidance on the correct tax rate to be applied, and administrators will withhold the tax from any withdrawals made and pay it over to SARS.

Van Niekerk says marginal tax rates will ensure that taxpayers in income distress and who do not have other sources of income, will pay a lower tax rate, while those who are not will have to think twice about the level of the withdrawal.

4.  Older provident fund members must opt-in

Treasury has agreed that provident fund members who were over the age of 55 on March 1 2021, should be excluded from the two-pot system but should have the right to opt in if they want to access their savings.

Treasury has agreed to amend the draft legislation which proposed that they be automatically included in the new system.

These provident fund members are exempt from the requirement to use two-thirds of any savings made after March 2021 to buy an annuity or pension. They can withdraw all their retirement savings in cash at retirement.

If they opt into the two-pot system, they will, like all other members, be able to immediately draw the money in their savings pot, but they will have to use future savings in the retirement pot to buy a pension at retirement.

If they opt in, they can only take the savings made up to implementation – the vested amount – and any money remaining in their savings pot - in cash at retirement.

Thela warned that if these provident fund members opt into the two-pot system, they cannot go back to contributing to their vested pot.

5.  Deductions

National Treasury also clarified how any deductions that need to be made from your retirement savings will be implemented.

Thela said the draft legislation will be amended to reflect that certain deductions be made proportionately from all components – the vested component, savings component and retirement component.

These deductions are those in terms of S37D of the Pensions Funds Act and include deductions made when you:

• Split your savings with your spouse on divorce,
• Have to pay maintenance from your retirement savings in terms of a maintenance order;
• Need to repay a home loan granted by your fund or backed by your fund when you resign; or
• Need to pay your employer damages for dishonesty or misconduct that you either admitted to or that a court ordered you to pay.

Thela said any other deductions for costs could be deducted from your contributions or any of the components in line with the rules of the fund.