South Africa’s retirement fund laws has undergone a sequence of adjustments since 2012 as a part of authorities’s Retirement Reform course of, which is geared toward making certain that retirees make sufficient retirement provision. The most up-to-date proposed adjustments have been introduced in December 2021, the place a positioning paper was issued which set out the panorama for the reform of the retirement fund trade in South Africa. The positioning paper proposed a extra intensive change to the trade and included proposals geared toward giving retirement fund members restricted entry to retirement fund financial savings earlier than retirement. Just a few months later in July 2022, the proposed Revenue Laws Amendment Bill (the “Bill”) was issued for public remark which, amongst others:
- Sets out proposed amendments to the Income Tax Act, permitting entry to retirement fund financial savings earlier than retirement (known as the Two-Pot System.)
- Proposes adjustments to the tax remedy of pre-retirement withdrawals and the relevant marginal tax charges.
Let’s unpack what among the proposed adjustments imply for retirement fund members and reply pertinent questions round this.
What is the aim of retirement reform?
Retirement Reform is the method whereby the government proposes adjustments to the laws to encourage retirement fund members to save lots of in the direction of their retirement, and in the end, retire with sufficient provision. One of the goals of Retirement Reform is to make sure that members retain retirement advantages till retirement. However, there’s a rising development of members leaving employment to realize early entry to retirement funds, significantly within the present financial local weather. The newest Retirement Reform proposal is ready to assist retirement fund members by permitting early entry to ring-fenced retirement funds whereas nonetheless retaining a portion to satisfy their retirement wants.
What is the proposed Two-Pot System?
Essentially, a member’s pool of retirement funding will probably be break up 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 these members’ retirement financial savings (often called the “Savings Pot”). The different two-thirds will probably be allotted to a portion of the member’s financial savings that will probably be preserved till retirement (often called the “Retirement Pot”).
What is the Savings Pot?
A member will probably be allowed to contribute a most quantity totalling one-third of the full month-to-month or annual retirement fund contribution to such members in what’s termed a “Savings Pot”. Amounts contributed to the Savings Pot could be accessed previous to retirement, nevertheless, members are solely permitted one withdrawal from the Savings Pot throughout any twelve-month interval and the proposed minimal withdrawal quantity is at present R2 000. Withdrawals from the Savings Pot will probably be included in members’ annual taxable earnings and shall be topic to their marginal earnings tax charge.
At retirement, a member might withdraw as much as the complete quantity of their Savings Pot as a money lump sum, taxed on the retirement tax tables. Withdrawals from a member’s Savings Pot will probably be topic to the particular guidelines of the retirement fund.
What is the Retirement Pot?
Members can allocate retirement fund contributions to their “Retirement Pot”, offered that a minimum of two-thirds of the full contributions are allotted to their Retirement Pot. Upon retirement, the full worth of a member’s Retirement Pot have to be paid within the type of an annuity (together with a dwelling annuity) in accordance with de minimis rule relevant to the acquisition of an annuity. Any quantities contributed to the Retirement Pot can’t be accessed earlier than their retirement date.
What is the “Vested Pot”?
The Two-Pot System will solely apply to retirement contributions made after the implementation date. Therefore, a member’s whole retirement curiosity in credit score instantly earlier than the implementation date will probably be known as a “Vested Pot” and won’t be subjected to the Two-Pot System. The Vested Pot shall embrace the full retirement fund curiosity within the fund and all future development on that quantity.
Once the Two-Pot system is applied, members will be unable 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 guidelines have been applied (click on right here to learn extra on this). Retirement fund members might not withdraw from their Vested Pot earlier than retirement.
How will a switch to a different retirement fund be applied?
If a member needs to switch their retirement curiosity to a different fund, they could achieve this with none tax implications, topic to the next:
- Funds from a Savings Pot can solely be transferred to a different Savings Pot or Retirement Pot.
- Funds from their Retirement Pot can solely be transferred to a different Retirement Pot.
- A retirement fund member might solely switch the out there funds from their Vested Pot into one other Vested Pot.
When will the Two-Pot System be applied?
National Treasury initially indicated a proposed implementation date which has subsequently modified to 1 March 2024 following session with the retirement fund trade stakeholders.
Where can I get extra info?
As National Treasury continues to have interaction with the retirement fund trade stakeholders, we suggest that retirement fund members communicate to an accredited monetary adviser in regards to the implications of those proposed adjustments.
Wesley Davids, Executive: Governance.
