Amendments to the Pension Funds Amendment Bill and the Revenue Laws Amendment Bill
The two-pot retirement system is a reform that will allow retirement fund members to make partial withdrawals from their retirement funds before retirement while preserving a portion that can only be accessed at retirement to help improve retirement outcomes. This means members need not resign to access part of their retirement benefit if they are in financial distress.
The new system will apply to all active retirement fund members in private and public sector funds, except for the old generation or legacy retirement annuity policies, or funds with no active participating members (such as funds in liquidation, beneficiary funds, closed funds, or dormant funds). Pensioners and members of provident funds who were 55 years and older on 1 March 2021 who have not opted to be part of the two-pot system will also be excluded.
This system is meant to support long-term retirement savings while offering flexibility to help fund members in financial distress. In many cases, retirement funds are the only savings that fund members have. Under the current system, some members resign to access their retirement fund savings to pay off debt, which is detrimental from the economic, financial planning, and retirement provision point of view. The two-pot system is meant to help fund members in times of financial difficulty by allowing access to the savings component before retirement. It is advisable that members use the savings component sparingly and only when there is a dire need. Importantly, it also protects a portion of savings to only be used for retirement.
Now that the two bills (the Pension Funds Amendment Bill and the Revenue Laws Amendment Bill) have been signed into law by the President, retirement funds must apply for rule amendments with the Financial Sector Conduct Authority and change their systems to implement the two-pot regime from 1 September 2024. Funds will also communicate with their members on how savings withdrawal claims will be processed.
The two-pot retirement system will be implemented on 1 September 2024 and will split your future retirement savings into two pots as follows:
- Savings pot: For one-third of your future savings from which you can withdraw once in a tax year without leaving your job or the fund. You can withdraw from your savings pot once every tax year as long as you have at least R2,000 to withdraw.
- Retirement pot: For two-thirds of your future retirement savings that must be preserved until retirement and used to buy a pension.
EXAMPLE
if person A’s retirement contribution in September 2024 is R900 per month, R300 will go to the savings component and R600 into the retirement component. From this example, person A can accumulate R3 600 in the savings component over a 12-month period. Person A would be able to withdraw any amount from the savings component, the withdrawal should not be less R2 000 and a withdrawal can only be made once in a tax year. One does not need to make a withdrawal from the savings component every tax year. Amounts in the account will still be available for withdrawal in future years and would benefit from tax-free growth within the account until a withdrawal is made.
Although it is called the two-pot system, there will be a third pot as well called the Vested Pot. This component will be made up of all your savings up to August 31 2024 and you will still have access to it if you resign from your fund. You will generally be able to do with the retirement savings in this pot what you could do with your retirement savings before 01 September 2024. For example, you can still take it in cash if you resign, are retrenched, or dismissed from an employer-sponsored fund but your savings in this pot in a retirement annuity (RA) will generally not be available until age 55.
The only retirement fund members who will not automatically become part of the new two-pot system are:
• “legacy” retirement annuity members, and
• members of provident or provident preservation funds who were 55 years or older on 1 March 2021 and who are still members of the same provident fund when the new system kicks in.
From the value of your fund on 31st August 2024, 10% or R30 000, whichever is lower, will be allocated to the savings component. This is called seeding capital. This will be a once-off transfer at the start of the two-pot system and will not be repeated in the following years.
EXAMPLE
If you have a R200 000 fund value on 31st August 2024 the seeding amount will be R20 000 (this being 10% of R200 000). If another member has R750 000 fund value in the vested component, the seeding amount will be R30 000, since 10% of R750 0000 exceeds the cap of R30 000. Despite R75 000 being the 10% of R750 000 – this amount will be capped at R30 000.
The withdrawal process will be determined by individual retirement funds. The first step is to ensure your retirement fund has your current contact details.
It is unlikely that funds will be able to pay out withdrawal claims immediately when the two-pot retirement system takes effect on 01 September. The new two-pot system will take effect on this date; however, several steps need to be implemented first. The seed capital calculation, which determines the initial amount to be allocated to the savings component will be conducted using values at the end of August. Funds will also need to receive, verify, and process withdrawal claims received.
Funds also need to amend their rules and have them approved by the Financial Sector Conduct Authority before implementing the new system. In addition, new systems need to be in place to allow for such annual withdrawals both from a fund and SARS perspective.
If a fund member chooses not to make a withdrawal from the savings component, the component will continue to grow. A withdrawal of any amount can be made when the member chooses to. The savings component can also be left untouched until retirement when a cash lump sum can be withdrawn.
WHAT HAPPENS WHEN A MEMBER RESIGNS FROM EMPLOYMENT?
Old rules will apply to retirement savings accumulated before 1 September 2024. A member still has full access to accumulated retirement savings (which will be in the vested component) when resigning – this can either be taken as cash (subject to tax) or transferred to another retirement fund. A member can also still access what is in the savings pot after resignation. The retirement component is not accessible when a member resigns.
WHAT HAPPENS IN THE EVENT OF A DIVORCE?
Divorce orders will continue to be applied against a member’s entire retirement savings meaning that the divorce order claim will be affected proportionally across all of the components that a member has. It is critical that the fund be notified if the process of getting divorced has been started.
WILL THE SAVINGS COMPONENT EARN INTEREST?
Yes, the money in the savings component will earn a fund return depending on how long it is invested.
WHAT IS THE EFFECT ON PROVIDENT FUND MEMBERS 55 YEARS OR OLDER ON 1 MARCH 2021?
These members will not be automatically included in the two-pot system, but they may elect to participate should they wish to. They can do so by applying to their provident fund. Should they elect to be in the two-pot system, they cannot reverse their decision.
WHERE WILL THE SEEDING COME FROM FOR PROVIDENT FUND MEMBERS LESS THAN 55 YEARS OLD IN 2021?
For the provident fund members who were less than 55 years on 01 March 2021, their seeding will be taken proportionally from the pot that was vested in 2021 and the non-vested pot.
WHAT SHOULD YOU DO?
- Please ensure that your retirement fund has your correct contact details. This is important so that they can contact you about the reform.
- Keep an eye out for communication from your retirement fund administrator or the trustees of the fund, as they need to communicate with members about the implementation of the reform.
- Carefully consider your options and seek advice from an accredited financial advisor.
- Identify your long-term savings goals and plan for your future – and try to save as much as you can when you can. Unforeseen events may mean that you must adjust the plan – but start with a plan. You will have more flexibility than ever before – but that comes with the responsibility to protect yourself now and for the future.
- If you are a provident fund member who was over the age of 55 on 1 March 2021, then you have the option of structuring your contributions to follow the two-pot design.
- If you have contributed to your retirement fund over several years, you may have access to a withdrawal from the seeding capital on implementation. Do not make hasty decisions to take a withdrawal. It may be tempting to make a withdrawal as soon as possible – but keep in mind that you will be giving up the amount drawn plus all interest on that amount in retirement. Plus, if you wait to withdraw money from the savings component until retirement, it will attract less tax.
- Consider whether you would rather transfer funds from your savings component to the retirement component.
- Do not let anyone pressure you to do anything that is not in your interest. While it is good to help people when one can, you have worked hard to save for retirement – and the longer it remains invested, the better.
- If you need help but do not know where to start, contact your retirement fund.
Future articles will discuss further details of the two-pot retirement system.