On 29 July 2022, National Treasury issued the Revenue Laws Amendment Bill 2022 (“draft legislation”), which includes the draft legislation for the “two pot retirement system”. The legislation is complex and still in draft form. National Treasury describes the draft legislation as “technically complex” and intends to consult further on the draft legislation as well as hold public hearings.
The industry’s understanding of Treasury’s intentions will evolve as this process and analysis unfold. The information discussed in this publication may change.
One of the controversial aspects of the draft legislation is the proposed implementation date of 1 March 2023, which the Treasury calls “optimistic”. Many have described this start date as impossible, given the changes that need to be made to administration systems, fund rules, processes, forms, training, and communication (among other requirements), and be tested, before this date. There is a push to allow members to access their retirement fund benefits as soon as possible. However, the implementation can only really begin once the draft legislation is finalised.
We have drafted this publication as if the implementation date of 1 March 2023 will proceed.
This is the member’s existing value in a retirement fund before 1 March 2023.
This is the part of the member’s value in the fund that they will be able to withdraw / access without their employment being terminated or leaving the fund. A withdrawal from this pot is called a “savings withdrawal”.
This is part of the member’s value in the fund that may only be paid on retirement (even if the member’s employment is terminated). A withdrawal from this pot on retirement is called a “retirement withdrawal”.
Treasury has made some important design choices for the two-pot system.
There is no “seeding” of the savings pot. That is, the savings pot is only built up from contributions made after 1 March 2023 and not from any amounts contributed to the fund before then.
There is no access to the retirement pot before retirement. Like the savings pot, the retirement pot is only built up from contributions into the fund after 1 March 2023.
Members may contribute up to 3% of contributions to the savings pot.
These design choices are discussed further below:
Three pots will be set up in the registered rules of a fund on 1 March 2023: vested pot, savings pot, and retirement pot.
The savings pot and the retirement pot are built up only from contributions to the fund after 1 March 2023.
The savings pot is the part of the fund that members will be able to take some money out of, without their employment being terminated and without leaving the fund.
The retirement pot is the part of the fund that members will only be able to access on retirement, even if their employment is terminated and they leave the fund.
The vested pot holds everything built up in the fund before 1 March 2023. No contributions are made to this pot after 1 March 2023 (except for a narrow category of members we discuss under the compulsory annuitisation heading below).
We believe that Treasury’s intention is to layer the compulsory annuitisation vesting and non-vesting amounts into the three pots and ensure that the same compulsory annuitisation rules apply going forward, as they do now, for existing members.
All contributions made to a fund before 1 March 2023 will be in the vested pot.
All contributions after 1 March 2023 (apart from a narrow exception discussed under the compulsory annuitisation heading below) will be split between the savings pot and the retirement pot. These two pots start with R0 on 1 March 2023 and are built up from there.
Contributions made to a retirement fund are usually tax-deductible. There is a limit on how much may be contributed to a fund and still be tax-deductible. Summarised, this limit is higher than 27.5% of a member’s gross remuneration or R350 000 per tax year.
Up to 33.3% (one-third) of tax-deductible contributions may be contributed to the savings pot. The member, subject to the rules of the fund and the limit, may decide how much is contributed to the savings pot. Presumably, the member may change their decision from time-to-time, although this is not addressed in the draft legislation.
All other contributions (whether tax-deductible or not) must be made to the retirement pot.
The split of contributions between the savings pot and the retirement pot is after expenses, fees, risk premiums, etc have been deducted.
All the pots continue to earn fund returns.
It appears that Treasury’s intention is that the current compulsory annuitisation rules will continue to apply to existing members of funds after the draft legislation is enacted. Thus, those amounts that are “vested” (for compulsory annuitisation purposes) now for existing members in terms of current legislation will continue to enjoy vesting and can be taken in cash on retirement.
For fund members who were 55 years or older on 1 March 2021, contributing to a provident fund at that time and still contributing to the same provident fund, under current legislation these members’ continued contributions (and fund return on these) to the same provident fund may be taken in cash on retirement. It appears that Treasury’s intention is to keep this situation unchanged, as these older members will make their ongoing contributions, after 1 March 2023, to the vested pot, ensuring the current legislation and rules continue to apply to these contributions when these members withdraw or retire.
The draft legislation does not clarify how section 37D deductions, such as maintenance orders, housing loans, and deductions related to employee misconduct, are to be dealt with under the two-pot system.
However, it is suggested that divorce orders must state which pot a non-member spouse’s pension interest is to be paid from. For this, the Divorce Act will need to be amended to take the pots into account. It is likely that there will be more discussion around how divorce orders and deductions should be managed under the two-pot system.
The draft legislation is subject to many interpretations for now. It is complex and may change before it is finalised. It is recommended that major decisions should not be taken in relation to the two-pot system, as draft legislation is currently structured.
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