10 things you need to know about South Africa’s proposed two-pot retirement system

The National Treasury’s proposed amendments to South Africa’s retirement laws could spell a major shake-up in how people access their pension funds.

Joon Chong, a partner at law firm Webber Wentzel, said that under the draft reforms the National Treasury will introduce a ‘two-pot’ system for retirement savings allowing members of retirement funds to access one-third of their pension savings once a year, in the event of an emergency –  while preserving the other two-thirds for retirement.

The new reforms are proposed in the 2022 Draft Revenue Laws Amendment Bill and are currently open for public comment until 29 August, said Chong. The new system is planned for 1 March 2023, although the Treasury said that this is probably optimistic.

The proposal is to split contributions into two pots for all retirement funds. However, in practice, members of longer-standing retirement funds will have three pots:

• The vested pot (amounts accumulated before the implementation date);
• 1/3 accessible savings pot, and;
• 2/3 retirement pot subject to full preservation until retirement (contributions after 1 March 2023 that have to be preserved until the retirement date).

This is regarded as a better alternative to people resigning their jobs to access their pensions or provident funds, said Chong.

Webber Wentzel provided ten important aspects of the proposed changes:

• Do not need to re-enrol: Existing members of funds do not have to re-enrol to access the two-pot system, as existing funds will be adapted to accommodate it. Each fund will have to review its rules to do so.

• Contributions will remain deductible: Up to specified caps contributions will remain deductible, but any contributions that are more than 27.5% of taxable income or R350,000 a year can only flow into the “retirement pot”.

• Vested pot valued immediately: All contributions and growth that are accumulated before 1 March 2023 (the “vested pot”) will have to be valued at the date immediately prior to implementation to enable the vesting of rights. The conditions that were attached to those contributions will remain in place.

• Savings pot starts in March: The “savings pot” will start to be accumulated from 1 March 2023, together with the “retirement pot”.

• Withdrawals taxable: Any amounts withdrawn from the savings pot will be included in the member’s taxable income for that tax year and taxed at the relevant marginal rate.

• Withdrawal limit: Only one withdrawal from the savings pot can be made a year, at a minimum of R2,000. All, or part of the amount accumulated in the savings pot up to the allowable withdrawal date each year can be taken out.

• Adding the pots together: On reaching retirement age, the member can add the savings pot to the retirement pot to purchase an annuity or can withdraw the full amount in the savings pot as cash, which will be taxed according to the retirement lump sum tables. The lump sum tables have more favourable tax rates (maximum of 36%) relative to the marginal rate tables that apply to annual withdrawals pre-retirement from the savings pot (maximum of 45%).

• Annuity purchase: On retirement, the total amount in the retirement pot must be used to purchase an annuity. The minimum amount that can be used to purchase an annuity is R165,000, amounts less than R165,000 in the retirement pot can be withdrawn as a lump sum.

• Vested pot withdrawals: Before retirement, it is still possible for a member to withdraw funds from the vested pot, and, as before, this withdrawal will be taxed according to the retirement lump sum tables.

• Transfers: Although no amounts can be transferred out of the retirement pot, transfers can be made into it from other pots (vesting, savings or retirement). No transfers can be made into the savings pot, unless from other savings pots. The retirement pot and the savings pot must be held in the same retirement fund (e.g., you cannot hold the savings pot in your old employer’s fund and the retirement pot in your new employer’s fund).

Read: Skilled South Africans are quitting their jobs – here’s where they are going