The two-pot system, to go ahead on 1 March 2024, tries to marry opposing concepts of access and preservation. On the one hand, ensuring that members retire better by preserving their benefits until retirement (not taking it in cash when they leave employment) and annuitising retirement benefits. On the other hand, Treasury recognises that members may need cash while they are still employed and members of the fund.
Treasury has recently issued an updated version of the two pot proposals (9 June 2023). You may hear the pots being referred to as ‘components’ (a technical term). Draft amendments to the Pension Funds Act have also been released by Treasury.
will go into a savings pot.
will go into a retirement pot.
will be added to both pots.
in a fund before 1 March 2024 (plus investment return on this) will go into the member’s vested pot.
An amount of 10% of the vested pot as of 29 February 2024, to a maximum of R25 000, will be allocated to the savings pot from 1 March 2024. This is called “seeding”. This can be paid out of the fund, at the member’s request, as of 1 March 2024. This creates immediate access to an amount from the retirement fund (savings pot) for members. Withdrawing from a member’s savings pot means they will have less money on which to retire.
A member may also decide to move amounts into the retirement pot from their savings pot and vested pot, but not the other way around.
Different rules apply to a provident fund member who was 55 or older on 1 March 2021 and is still a member of the same provident fund: these members will contribute to the vested pot and the same rules apply to them as applied before 1 March 2024.
Treasury will allow these older members to opt into the two-pot system and contribute to a savings pot and retirement pot after 1 March 2024. If they do opt-in, it is likely they would then lose all the compulsory annuitisation vesting on their ongoing contributions after 1 March 2024 (so would have to annuitise more of their retirement benefit).
If a member emigrates from South Africa and ceases to be a tax resident (amongst other circumstances) they will be able to access their retirement pot and vested pot as a lump sum withdrawal subject to the 3-year rule that currently applies only to members of a retirement annuity fund, pension preservation fund or provident preservation fund. It is envisaged that they will be able to access their savings pot during the three years period along the same lines as other members.
Defined benefit funds will calculate the one-third contributions to the savings pot based on one-third of the member’s pensionable service increase. The two-thirds contributions to the retirement pot will be based on two-thirds of the member’s pensionable service increase with effect from 1 March 2024.
Defined benefit funds members will also have an allocation from their vested pot to their savings pot (seeding) as of 1 March 2024, which will be done through a past service adjustment.
The proposed exemption for “legacy retirement annuity fund” policies from the provisions of the two-pot system is going ahead. Treasury recognises that, without the exemption, these funds would have to be re-designed.
To qualify for the exemption, the legacy retirement annuity fund will have to submit a declaration to the Financial Sector Conduct Authority (FSCA) and must exhibit the following features:
The FSCA may verify that the legacy retirement annuity funds meet the exemption criteria.
Deductions under section 37D of the Pension Funds Act, for example for housing loans, divorce orders, and maintenance orders will need some attention and the Pension Funds Act will be amended. It appears that deductions can only be made from the retirement pot and the vested pot, not the savings pot. The draft legislation still needs refinement in this regard, but the process has started.
Necessary amendments to the Pension Funds Act to align it with the two-pot system have been drafted, In addition, there are a number of other amendments included in the draft legislation. For example, to allow for compensation orders in criminal proceedings granted (in terms of section 300 of the Criminal Procedure Act, 1977) to be taken into account when benefits are withheld as a result of misconduct at the employer. In addition, the amendment specifies that future maintenance orders will not be deducted and paid over as a lump sum (as is sometimes sought to be ordered) but, for example, as monthly amounts.
The two-pot system proposals (as depicted above) are just that – proposals. Thus, they may change before the legislation is finalised. The draft legislation will go through a comment period, public hearings, and Parliament. There will be a great deal to communicate to members, some of which, for example, the taxation aspects, is complex. While we all must wait for the final legislation, the industry is working on what it can do now, in order to be ready on time.
Cookies are small text files that are stored on your device (computer, tablet, or mobile phone) when you visit certain websites. They are widely used to enhance your online experience by remembering your preferences and actions over time. Cookies are not harmful and do not contain personal information like your name or payment details.
You have the option to manage your cookie preferences. You can usually modify your browser settings to accept, reject, or delete cookies. Please note that if you choose to block or delete cookies, some features of our website may not function properly.