On 9 June 2023, National Treasury published two draft Bills (Draft Revenue Laws Amendment Bill, 2023 and Draft Revenue Administration and Pension Laws Amendment Bill, 2023) along with a memorandum on the proposed implementation of the two-pot retirement system which is set to come into effect on the 1st of March 2024. The draft Bill is broken down into 2 stages and provides clarity on the way forward in terms of the Governments attempt to promote retirement savings, which has resulted in significant reforms since 2012.
The draft legislation (Draft Memo and Draft Explanatory Memorandum) incorporates public comments on the 2022 Draft Revenue Laws Amendment Bill, which was released on 29 July 2022, and contains the legislative revisions necessary to establish the first phase of the “two-pot” retirement scheme. The word “pot” will be changed to “component” in the bills that the Minister will formally introduce to Parliament. The term “pot” will still be used informally.
South Africa currently offers different retirement fund vehicles to those who wish to save for retirement, including pension funds, pension preservation funds, provident funds, provident preservation funds and retirement annuity funds. However, these funds all had different rules for contributions to the funds, as well as differing rules relating to withdrawals from these funds. The current system attempted to discourage pre-retirement withdrawals by setting taxes on pre-retirement withdrawals purposefully higher than on retirement withdrawals. However, the expected outcome of curtailing pre-retirement withdrawals has not been achieved. Many fund members still withdraw most of their savings regardless of the tax rates applied to those withdrawals, leading to undesirable outcomes.
This new regime proposes the creation of the following three components within the retirement funds by the introduction of the definitions of “savings component”, “retirement component” and “vested component”. The “two-pot” approach is intended to safeguard pre-retirement savings by allowing individuals access to a portion of their retirement funds to alleviate their financial hardships by setting out a “savings component” for withdrawals without a member having to cease employment, resign or retire from their respective fund.
The revised Bills provide for amendments to the Income Tax Act and Pension Fund Act aimed at giving effect to the new “two-pots “retirement regime by proposals for key changes that deal with:
- The creation of the following three components within the retirement funds, as well as the introduction of the definitions of “savings component”, “retirement component” and “vested component”
- The creation of seed capital available for withdrawal by the member on implementation of the “two-pots” retirement system, calculated at 10% of the member’s savings capped at R25 000
- The inclusion of and equitable treatment of defined benefit funds.
- The introduction of the “savings withdrawal benefit” as well as the inclusion of such definition
- The introduction of tax-free transfers between funds and paragraph 6B on dealing with these transfers
- The definition and inclusion of a “savings withdrawal benefit”, “members intertest in the retirement component”, “members interest in the savings component” and “members interest in the vested component”
- The exemption of legacy retirement annuity fund policies from the proposed new system and allowance for members over 55 have the option to contribute to their current regime fund or move to the two-pot system.
As a result of these changes, from 1 March 2024, one-third of any contributions will go towards retirement savings and into a “savings pot” from which withdrawals are allowed pre-retirement. The remaining two-thirds will go into a “retirement pot” to be accessed on retirement and not before. The Bill also sets out specific requirements for the transition of pre-retirement savings that were accumulated before the effective date of 01 March 2024, and which are dealt with in terms of the “vested component” and “retirement component”.
The Draft Revenue Administration and Pension Laws Amendment Bill provides for certain amendments to the Pension Fund Act that are necessary for retirement funds to effectively and appropriately implement the amendments to the Income Tax Act.
The media statement invited the public to comment on these documents by the close of business on 15 July 2023. Written comments must be submitted to the National Treasury’s depository at 2023AnnexCProp@treasury.gov.za and SARS at acollins@sars.gov.za.