New retirement system to give access to savings before retirement

In light of the financial distress caused by the COVID-19 pandemic, the National Treasury drafted a new two-pot retirement system for March 2023.

The draft reforms will allow pension fund members access to one-third of their savings once a year, while the other two-thirds will be preserved for retirement.

The draft reforms were released by the National Treasury on 29 July 2022, but the proposed amendments will not allow pre-retirement access to current accumulated savings – only to a portion of future savings.

A lot of work is also needed by the Financial Sector Conduct Authority (FSCA), retirement funds, fund administrators, and the South African Revenue Service (SARS) to accommodate the two-pot retirement system.

The intention of the two-pot system is to address the following concerns:

• The inability of households in financial distress to access their retirement savings before withdrawal or retirement.
• The failure to preserve funds for retirement in instances where members withdraw from their pension or provident funds on termination of employment.

As it stands, the current rules applicable to pension and provident funds only allow members to access their retirement savings upon withdrawal or retirement.

As a result, in times of financial distress, members of pension or provident funds sometimes terminate their employment to withdraw from their pension or provident funds.

On the other hand, members of preservation funds and retirement annuity funds are only allowed one full or partial withdrawal from the fund before retirement.

While the purpose of the two-pot system is to give members immediate access to their retirement savings to relieve financial pressures, the proposed amendments will only give members access to their savings accumulated after 1 March 2022.

Despite this, the National Treasury said that the two-pot system “will present a better balance between ensuring the preservation of retirement savings and allowing some withdrawals through a savings vehicle incorporated into the retirement funds”.

What you need to know about the two-pot proposal

Deirdre Phillips, a partner at law firm Bowmans, said that from 1 March 2023, all pension, provident, preservation and retirement annuity funds would be obliged to allocate contributions into two pots.

However, members of longer-standing retirement funds will have three pots, and these pots are as followings:

• The Savings pot – Accounts for 1/3 of contributions and will be accessible annually.
• The Retirement pot – Accounts for 2/3 of contributions and is subject to complete preservation until retirement.
• The Vested pot – Amounts accumulated up to 28 February 2023 and the conditions attached to those contributions will remain in place.

The amount withdrawn from the savings pot will be subject to the standard tax rates, and it will not be possible to remove funds from the retirement pot – even after termination of employment before retirement.

Other important aspects to consider are:

• Members 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.
• Withdrawal limit – Withdrawals from the savings pot can be made once 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 total amount in the savings pot as cash. This 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%).
• 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). Transfers into the savings pot can only be made from another savings pot. The retirement and savings pot must be held in the same retirement fund.
• Annuity purchase: On retirement, the total amount in the retirement pot must be used to purchase an annuity. The minimum amount that members can use to purchase an annuity is R165,000. Amounts less than R165,000 in the retirement pot can be withdrawn as a lump sum.

Tax considerations in respect of the two-pot system

According to Aneria Bouwer, a tax specialist at Bowmans, any amount withdrawn from the savings pot will be included in the member’s normal taxable income and will not be subject to the Withdrawal Tax Table.

National Treasury was concerned that applying the Withdrawal Tax Table to a savings withdrawal benefit would provide some form of tax arbitrage.

The 36% marginal tax rate in the Withdrawal Tax Table is still 9% lower than the marginal tax rate in the normal tax tables (45%). High-income earners who benefit from a 45% tax benefit when claiming their contributions as a deduction would thus have a 9% tax ‘saving’ if taxed at 36% on a savings benefit.

The fact that the National Treasury has not made any changes to the tax treatment of contributions while taxing the savings withdrawal benefit at the normal tax rate demonstrates that the policy intends to encourage members to save for retirement and to avoid withdrawals from the savings pot.

Further, the fact that provision is made for amounts to be transferred tax-free from a Savings pot to a Retirement pot or between similar pots in different funds again demonstrates this policy intention.

There is still a lot to be done before implementation

Much work would need to be done by the FSCA, retirement funds, fund administrators, and SARS before 1 March 2023 to ensure the implementation of the two-pot system.

For example, retirement fund rules would need to be amended to accommodate the two-pot systems; transfer between funds and ensuring vested rights. 

Retirement funds would also need to reconsider their investment strategies and whether assets would need to be invested in more liquid portfolios.

The FSCA will need to approve rule amendments and deal with fund queries, while administrators may need to update their systems to accommodate the split among the three pots, and SARS must also approve the amended rules.

Whether the two-pot system will be implemented in its current proposed form by March 2023 remains to be seen, and some say that the proposed implementation date is a bit ambitious.