National Treasury’s proposed two-pot system for retirement savings has prompted many questions from members, employers and trustees – and many of those queries are landing on the desks of intermediaries.
Blessing Utete, Managing Executive at Old Mutual Corporate Consultants, describes National Treasury’s proposed two-pot system for retirement savings as ‘a monumental shift for the retirement sector’.
When Minister of Finance Enoch Godongwana tabled the 2023 National Budget, he confirmed that the date of implementation would remain 1 March 2024.
On 9 June 2023, the revised 2023 Draft Revenue Laws Amendment Bills was made available for public comment. This is a significant step forward, bringing much-needed clarity to several crucial grey areas.
Here are a few of the most often asked questions and the best way to answer them based on what we know so far.
1. How will the two-pot system work?
It’s important to remember that the changes will not be implemented retroactively. All the rights, requirements and restrictions that apply to members’ existing retirement savings in a fund therefore will not be impacted. Only contributions made after 1 March 2024 will be regulated by the new two-pot system.
After 1 March, all retirement-fund contributions will be split between two pots. One third will be allocated to the Savings Pot from which members will be able to make one withdrawal a year.
The remaining two thirds will go into the Retirement Pot, which members can only access once they retire and will only be able to use to buy a monthly pension.
(One of the June 2023 revisions sees a change in terminology, with the ‘pots’ now referred to as ‘components’. Most clients and fund members, however, will still refer to them as pots – and to avoid confusion, that’s the terminology we’ll use here as well.)
When a member therefore reaches retirement age and wishes to retire from the fund, they will have to use the full balance of the Retirement Pot plus the portion of the ring-fenced amount – their retirement savings plus investment growth up until 29 February 2024 – to buy a retirement annuity. For pension-fund members this will be two thirds of the total amount.
The only exception will be if the total amount in the Retirement Pot is less than R165 000 when a member retires from the fund. In this instance, they will be able to take the full amount as a lump sum.
Upon retirement, members will be able to take the full balance of the Savings Pot plus the portion of the ring-fenced amount that may be taken in cash (one third in the case of pension-fund members) as a cash lump sum.
This will apply to all pension funds, provident funds, retirement annuity funds and preservation funds. What is and isn’t allowed will be strictly regulated and we are waiting for those rules and regulations to be finalised.
2. Can fund members access their money now?
Not all of it, and not just yet. The new rules will only apply to fund members’ savings accumulated after the date on which the new system has come into effect on 1 March 2024.
When the Two-Pot reforms go into effect, your retirement fund will value existing retirement savings and will allocate this amount to its own pot, which the industry calls the vested component.
The current rules would still apply to existing retirement savings and will be subject to the existing rights of access and existing withdrawal tax tables.
Then, 10% of this pot, up to a maximum of R25 000, will be allocated to the Savings pot and will be available from March 2024.
3. How much can fund members access?
You’ll hear this question a lot, but it’s the wrong question to ask. Retirement funds are not, and were never intended to be, transactional bank accounts. They are designed for long-term savings, which should be preserved. However, under the two-pot system retirement-fund members will be allowed to withdraw money from their Savings Pot once a year before they retire. (According to the government, this should only be in an emergency, but what constitutes an ‘emergency’ has not been defined, and members will not have to provide a reason for making a withdrawal.)
The minimum withdrawal amount from the Savings Pot is R2 000. There is no maximum amount. It’s worth noting that anything withdrawn from the member’s Savings Pot will be included in their taxable income for that tax year and will be taxed at the applicable marginal rate.
4. What if a member is 55 or older?
Under the draft legislation, people who were 55 years or older on 1 March 2021 and in a provident-fund, will have the option to stay and continue contributing to their current provident fund, or to move to the new two-pot regime if they want to.
5. What does this mean for fund administrators?
National Treasury admits: ‘The amendments are technically complex, as they attempt to fit a pre-retirement withdrawal scheme into existing retirement savings vehicles primarily meant to cater for long-term savings.’ In other words, it’s going to lead to a lot of admin.
The good news for intermediaries is that if your clients are with a well-run fund, things should go relatively smoothly. On-the-ball fund administrators will already have plans in place to deal with the complexities of partial early withdrawals and will be able to respond quickly to unforeseen delays.
Fund members will expect their funds to tell them what they can access, when and how; and employers will expect their fund administrators to adapt quickly. As Utete says: ‘As an employer, you don’t want more admin. You don’t want staff coming to you asking for forms and how much is available to them, and then chasing their money every year.
6. Will the two-pot system apply to all funds?
No. Retirement-annuity funds underpinned by legacy-fund member policies will have an option to apply for an exemption from these reforms. ‘This is important because these policies were never designed to allow for access prior to reaching retirement age,’ says Utete.
The regulations also accommodate defined benefit funds, which are funds that use a defined formula to calculate benefits due to a member on retirement. The proposed legislation provides that the reference point for calculation of the member’s interests in defined benefit funds and the consequent adjustments thereto to facilitate the two-pot reforms will be the relevant member’s pensionable years of service.
ARTICLE BY MARK VAN DIJK – OLD MUTUAL
