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Yet more two-pot essentials for advisers, clients

23 July 2024 Gareth Stokes

Yes, dear reader, you guessed it from the headline. Today’s newsletter is another ‘what you need to know about the two-pots retirement system’ explainer. You may as well resign yourself to plenty more of this type of article in your mailbox over the coming months as all and sundry prepare for the solution’s 1 September 2024 implementation date.

Essential aspects of two-pots

This discussion is informed by a two-pot media briefing hosted by diversified financial services firm, Alexforbes, under the banner of ‘examining essential aspects of the two-pot retirement system including its potential blind spots’. It started with the usual background, which most of you should be familiar with by now. As a basic refresher, from 1 September, members of a retirement fund will see their retirement savings statement sliced and diced into three components. 

The first of the three, called the vested component, holds the member’s retirement fund balance on 31 August. The second and third components, referred to as the savings component and retirement component, are new components that will be created for each fund member by their retirement fund administrator from 1 September. It is these two components that are in focus whenever you hear the phrase two-pots. You should note that the legislation refers to ‘components’ while the industry and media favour ‘pots’; in this context, component and pot can be used interchangeably. 

The savings pot will be pre-funded from the 31 August balance on a member’s retirement fund using a simple formula of 10% of the balance, but limited to a maximum of R30,000.00. The retirement pot starts with a nil balance. From 1 September, each new retirement contribution will be split one-third to the savings pot and two-thirds to the retirement pot. It is important for fund members to understand how each of these components will be treated. Access to your vested component will continue in line with the laws in force pre-September, including annuitisation and fund rules, meaning you can only withdraw funds on resignation from the fund or at retirement. 

So, what happens from Spring Day?

From 1 September, fund members can access their savings pot once per annum, subject to minimum withdrawal rules; but to dip into the retirement pot, you will have to wait until retirement, with a handful of exceptions. With the basics of the two-pot system out of the way, Fiona Rollason, Group Head: Legal and Insurance at Alexforbes, stepped up to focus on technical, regulatory aspects. “My intention is to clarify the misunderstanding or miscommunication that we have picked up in our interactions with members and clients,” she said, immediately dispelling the myth that the vested pot would become totally inaccessible under the new system. 

“We have seen some concerns from people thinking that there will be limited access to the vested component, and that they should try and resign to access it now; that is not the case at all … it will continue to be available to members after 1 September in exactly the same way as it is available to them now,” Rollason said. The balance in the vested pot will also continue to be invested and grow in line with the fund returns. She mentioned the first of many exceptions under the incoming regulatory framework, being provident fund members who were 55 years or older on 1 March 2021. These individuals, who were exempted from the then-introduced annuitisation requirements, can also opt out of two-pots. 

The press ‘buzz’ around two-pots has been around fund members’ access to the savings pot and whether or not retirement fund administrators will be able to process the expected deluge of applications for withdrawals, let alone having enough cash liquidity to do so. Consumers and their financial advisers should, however, be more concerned about the immediate tax implications of these withdrawals, and the longer-term ‘dent’ on retirement funding outcomes. As mentioned, a fund member gets to make one withdrawal from the savings pot each year subject to a minimum of R2,000.00 and a maximum of the sum available in the pot. 

You do not have to spend it!

“There is no requirement to take a withdrawal each year and the money will still be available to you in the next period; members do not face a ‘use it or lose it’ scenario,” Rollason said. Each withdrawal from the savings pot is taxed at the fund member’s marginal income tax rate, prompting a warning of significant tax consequences in the event the withdrawal pushes a member into the next tax bracket. “When taking money out [of the savings pot] you are also losing or squandering the tax deduction that you get on that amount going in because you pay marginal tax rates on it going out,” she said. Amounts drawn from the savings pot at retirement will be treated differently, in accordance with the retirement tax tables. 

The retirement component must be annuitized at retirement … and it is this ‘rule’ that financial advisers should take careful note of. “It is important for people to understand that there is a difference in how much you can access from the vested pot on retirement [versus the retirement pot],” Rollason said. Under the old system, many clients relied on the one-third cash lump sum from their retirement fund to offset any number of expenses; under the two-pots system, retirees might reach retirement with a zero balance in their savings pot, meaning there is no cash to take as a lump sum. PS, this may not be an immediate issue, as many pre-two-pots retirees will have balances available in their vested pot, which will be dealt with under today’s retirement regime. 

Two-pots experts need to study up on three pieces of legislation that are at different stages of being finalised. First, the Revenue Laws Amendment Act (RLAA) of 2024 which is already signed into law and introduces two-pots from 1 September. Second, the Revenue Laws Amendment Bill (RLAB) which is still in process and may not even make the 1 September deadline. And third, the Pension Funds Amendment (PFA) Act, which President Cyril Ramaphosa signed into law on 21 July 2024.  “There are some anomalies in the RLAA that are being addressed in the RLAB; the challenge for industry, SARS and the regulators is that the RLAB may not become law before 1 September,” Rollason said. 

PFA Bill delay causing hiccups

The last-minute signing of the PFA Act is welcome news because the Financial Sector Conduct Authority (FSCA) can finally start processing the backlog of retirement fund rules amendments required to make two-pots happen. The PFA Act also contains the regulatory changes needed for section 37D withdrawals under the two-pots system. This newsletter will not dive into technical aspects around S37D, preferring instead to comment on the more commonplace taxation aspects.

Alexforbes offered a useful summary of the tax treatment of withdrawals from the multi-component retirement system. For the vested component, a withdrawal at retirement is dealt with per the retirement tax table while those allowed pre-retirement are handled per the withdrawal tax table. Pre-retirement withdrawals from the savings pot are taxed at the fund member’s marginal rate, and withdrawals at retirement are treated per the retirement tax table. And lastly, you cannot presently make pre- or post-retirement withdrawals from the retirement component. The funds in this pot must be used to purchase a pension. 

It seems SARS has eyes on your savings too

Financial advisers and planners may wish to advise their clients of how SARS will approach withdrawals from the savings pot. According to Rollason, your client’s retirement fund has to apply for a tax directive using an IRP3A each time an amount is withdrawn from the savings account. She warns: “SARS have said that when we apply for tax on a savings pot claim, that they may issue an IT88 assessment for arrears tax”. Diving into the savings pot could, therefore, be a bad idea for a client whose tax affairs are in disarray. 

Writer’s thoughts:

One of the potential issues with the two-pots system is that drawdowns against the savings pot will result in less cash being available for a lump sum withdrawal at retirement. Is this cause for concern, and how are you raising this with clients? Please comment below, interact with us on X at @fanews_online or email us your thoughts editor@fanews.co.za.

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