Regulatory update: Two-Pot System for retirement funds


South Africa’s retirement fund legislation has undergone a series of changes since 2012 as part of government’s Retirement Reform process, which is aimed at ensuring that retirees make adequate retirement provision. The most recent proposed changes were announced in December 2021, where a positioning paper was issued which set out the landscape for the reform of the retirement fund industry in South Africa. The positioning paper proposed a more extensive change to the industry and included proposals aimed at giving retirement fund members limited access to retirement fund savings before retirement. A few months later in July 2022, the proposed Revenue Laws Amendment Bill (the “Bill”) was issued for public comment which, amongst others:

  • Sets out proposed amendments to the Income Tax Act, allowing access to retirement fund savings before retirement (referred to as the Two-Pot Sys­tem.)
  • Proposes changes to the tax treatment of pre-retirement withdrawals and the applicable marginal tax rates.

Let’s unpack what some of the proposed changes mean for retirement fund members and answer pertinent questions around this.

What is the purpose of retirement reform?

Retirement Reform is the process whereby the govern­ment proposes changes to the legislation to encourage retirement fund members to save towards their retire­ment, and ultimately, retire with adequate provision. One of the aims of Retirement Reform is to ensure that members retain retirement benefits until retirement. However, there is a growing trend of members leaving employment to gain early access to retirement funds, particularly in the current economic climate. The latest Retirement Reform proposal is set to help retirement fund members by allowing early access to ring-fenced retirement funds while still retaining a portion to meet their retirement needs.

What is the proposed Two-Pot System?

Essentially, a member’s pool of retirement funding will be split into two pots: the Savings Pot and the Retirement Pot. The Bill proposes that retirement fund members be allowed to allocate one-third of their retirement fund contributions from the date of imple­mentation to an accessible portion of those members’ retirement savings (known as the “Savings Pot”). The other two-thirds will be allocated to a portion of the member’s savings that will be preserved until retire­ment (known as the “Retirement Pot”).

What is the Savings Pot?

A member will be allowed to contribute a maximum amount totalling one-third of the total monthly or annual retirement fund contribution to such members in what is termed a “Savings Pot”. Amounts contribut­ed to the Savings Pot can be accessed prior to retire­ment, however, members are only permitted one with­drawal from the Savings Pot during any twelve-month period and the proposed minimum withdrawal amount is currently R2 000. Withdrawals from the Savings Pot will be included in members’ annual taxable income and shall be subject to their marginal income tax rate.

At retirement, a member may withdraw up to the full amount of their Savings Pot as a cash lump sum, taxed at the retirement tax tables. Withdrawals from a mem­ber’s Savings Pot will be subject to the specific rules of the retirement fund.

What is the Retirement Pot?

Members can allocate retirement fund contributions to their “Retirement Pot”, provided that no less than two-thirds of the total contributions are allocated to their Retirement Pot. Upon retirement, the total value of a member’s Retirement Pot must be paid in the form of an annuity (including a living annuity) in accordance with de minimis rule applicable to the purchase of an annuity. Any amounts contributed to the Retirement Pot cannot be accessed before their retirement date.

What is the “Vested Pot”?

The Two-Pot System will only apply to retirement contributions made after the implementation date. Therefore, a member’s total retirement interest in credit immediately before the implementation date will be referred to as a “Vested Pot” and will not be subjected to the Two-Pot System. The Vested Pot shall include the total retirement fund interest in the fund and all future growth on that amount.

Once the Two-Pot system is implemented, members will not be able to make any contributions to the Vested Pot. This excludes a member of a provident fund, who was 55 years of age or older on 1 March 2021 when new annuitisation rules were implemented (click here to read more on this). Retirement fund members may not withdraw from their Vested Pot before retirement.

How will a transfer to another retirement fund be implemented?

If a member wishes to transfer their retirement interest to another fund, they may do so without any tax implications, subject to the following:

  • Funds from a Savings Pot can only be transferred to another Savings Pot or Retirement Pot.
  • Funds from their Retirement Pot can only be trans­ferred to another Retirement Pot.
  • A retirement fund member may only transfer the available funds from their Vested Pot into another Vested Pot.

When will the Two-Pot System be implemented?

National Treasury initially indicated a proposed imple­mentation date which has subsequently changed to 1 March 2024 following consultation with the retirement fund industry stakeholders.

Where can I get more information?

As National Treasury continues to engage with the retirement fund industry stakeholders, we recommend that retirement fund members speak to an accredited financial adviser about the implications of these proposed changes.

Wesley Davids, Executive: Governance.

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