What your clients must know about Treasury’s two-pot retirement system
Government and National Treasury (NT) have ambitious plans to tackle two critical shortcomings in South Africa’s retirement funding landscape. They have proposed a two-pot retirement solution that they believe will allow retirement fund members to access some of their accumulated retirement savings during times of financial hardship, while simultaneously improving preservation practices.
High-level overview of the proposed system
FAnews has attended countless presentations on the two-pot retirement system since it was first proposed, with each event offering fresh insights into the administrative complexities, benefits and challenges that the industry will face through its implementation. Case in point, the recent Employee Benefits webinar hosted virtually by law firm Bowmans. At this event, Deirdre Phillips, a partner in Banking and Financial Services Regulatory Practice at the firm, explored the pending two-pot system under four headings, including a high-level overview of the purpose of NT’s intervention and resulting changes to the Income Tax Act; the likely tax implications for retirees; the responses that NT has put forward following public comments on its initial proposals; and issues that employee benefits experts are encountering in interpreting and understanding the regulatory intervention. This newsletter deals mostly with her high-level overview.
To begin, Phillips reminded the audience that the two-pots retirement system was introduced through the Draft Revenue Law Amendment Bill as published by NT on 29 July 2022. The Bill proposed various changes to the Income Tax Act alongside an invitation for public comment on said changes, by no later than end-August. NT also held a workshop with industry on 12 September, before providing comprehensive feedback to Parliament on 20 September. “NT highlights the following two concerns that it wishes to address: [first,] the inability of households in financial distress to access their retirement savings prior to withdrawal or retirement, and [second,] the failure to preserve for retirement when members withdraw or resign,” said Phillips.
Accommodating the COVID-19 and lockdown experience
The argument to give retirement fund members freer access to their retirement savings gained momentum following the 2020-21 COVID-19 pandemic and national lockdown, which resulted in many households facing serious financial stress. “The current laws provide that a pension fund member is only entitled to access their benefits upon retirement, withdrawal from the fund [following resignation or retrenchment] or in the event where the member passes, on death,” explains Phillips. Members of preservation funds or retirement annuities may only access their funds upon retirement, whereas provident fund members are entitled to a once-off withdrawal benefit.
Herewith the broad brushstrokes of the proposed two-pots retirement system, as described by Bowmans. From 1 March 2024, the administrators of South Africa’s pension, provident and retirement funds and retirement annuity funds will have to monitor and report on each fund member’s retirement capital under three (ironically, given the two-pot descriptor) pots. The first is a savings pot, to which not less than a third of a member’s total contribution, excluding fees and risk premiums, must be deposited. The second is a retirement pot, which must receive not less than two thirds of the available contributions, once again calculated net of fees and risk premiums. And the third is the vested pot, being the accumulated balance in a member’s retirement fund on the date the two-pot retirement system comes into force.
Dipping into each pot to see what they contain
The Income Tax Act introduces a number of definitions and rules to accommodate the savings pot. For example, it defines this pot as “the savings withdrawal benefit” which a member may access and stipulates that not less than ZAR2 000,00 may be withdrawn in any rolling 12-month period. “From implementation date, the contribution that a member pays into the savings pot may be withdrawn; [importantly,] a member does not need to have retired or resigned from the fund to access the savings pot,” said Phillips. Any balance remaining in the member’s savings pot upon retirement can either be withdrawn as cash, subject to the in-force taxation laws, or be seamlessly transferred into the retirement pot. A final observation is that upon death, the balance in the savings pot will either be transferred to the fund member’s nominated beneficiaries or to the estate.
There are a number of things that employee benefits consultants and financial advisers need to be aware of insofar the functioning of the second pot, the retirement pot. “A fund member can transfer the funds from a retirement pot in one fund, into the retirement pot in another,” noted Phillips. However, the funds accumulated in the retirement pot can only be withdrawn upon retirement… Most importantly, the entire balance in this fund must be purposed towards providing a pension for the fund member upon retirement using a life or living annuity or some combination of the two. According to Phillips, a retirement pot balance of less than ZAR165 000,00 can be withdrawn in cash, with one notable consideration: this cap is cumulative across the three pots in a fund.
Fund members’ enshrined rights and obligations apply
As for the vested pot, it will be ‘grandfathered’ to retain whatever obligations and rights are enshrined in the existing retirement fund legislation. “You can make tax free transfers from the vested pot in one fund, to the vested pot in another fund; but you may not make further contributions to the vested pot unless you were a provident fund member, and you were 55 years of age or older on 1 March 2021,” said Phillips. The rules set out in the two-pot system will apply to both defined contribution and defined benefits funds, with all pots being invested in a regulation 28 compliant manner. “The wording of the draft bill makes it clear that the changes will apply to all funds, so the savings pot, retirement pot and vested pot will have to be included in funds’ rules,” said Phillips.
As industry stakeholders familiarise themselves with the proposed changes, the big questions centre on the complexity and cost of administering three pots of retirement capital for each fund member. Some concerns have been raised about the number of regulatory changes, historic and pending, that affect retirement funds, members and administrators. The industry has already had to adapt to the Financial Sector Regulation Act and changes to annuitisation… Now, it faces the Conduct of Financial Institutions Act; proposed amendments to section 37D, the two-pot retirement system; and further amendments to section 37D, to name a few. “Ultimately, it may be the member that ends up paying for the resulting costs, unless funds have reserves to deal with legislative amendments,” said Phillips.
Retirement funds are not bank accounts
Until the final Revenue Laws Amendment Bill appears, retirement industry stakeholders are playing a bit of a wait-and-see game. “We expect a couple more iterations of the bill, where NT properly accounts for the impact of the huge impact of the two-pot retirement system on, including what it will mean to the industry as a whole and to individual members,” concluded Phillips. “Whatever happens, we cannot lose sight of the initial policy intent, which was to preserve retirement savings rather than allowing funds to be treated as bank accounts”.
Writer’s thoughts:
National Treasury’s proposed amendments to the Income Tax Act will introduce complexity and cost to retirement fund administrators, the latter no doubt being passed on to retirement fund members. Even so, one hopes the added complexity and cost will yield long-term improvements. Have you studied the proposed two-pots retirement system and do you believe it will achieve broad objectives of emergency access to savings; preservation; and improved retirement outcomes? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.
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