Vickie Lange | Head | Best Practice | Alexforbes | mail me |
National Treasury and the South African Revenue Service (SARS) provided important feedback at the recent sitting of the Standing Committee on Finance as part of the parliamentary process regarding the much anticipated two-pot retirement system.
This feedback followed workshops and public consultations in September regarding the proposed system.
It is important to note that what follows in this update is based on the feedback given by National Treasury to the parliamentary committee. The final legislation has yet to be issued, and parliamentary approval is still required before we have certainty.
Key announcements
During the Parliamentary briefing, key announcements and clarification on a few material aspects were provided:
- The new proposed effective date for the two-pot system is 1 March 2025.
- The initial seed capital proposal of 10% of a member’s retirement savings value on 29 February 2024 – which is currently limited to a maximum of R25,000 – has been revised. The new proposal for seed capital is 10% of a member’s retirement savings value on 28 February 2025 and is limited to a maximum of R30,000. The seed capital reduces a member’s vested component and is transferred to the savings component as the starting balance.
- Cash lump sum withdrawals from the savings component after 1 March 2025, including seed capital, will be taxed at members’ marginal rates should it be withdrawn before retirement.
- National Treasury proposed the implementation of a withholding tax process rather than a tax directive process for savings withdrawal claims. Should this be approved, SARS will provide guidance on the correct tax rate to the fund administrator for the tax deduction from a savings withdrawal claim.
- Provident fund members who were 55 years or older on 1 March 2021 will be able to opt in to the two-pot system. In other words, the two-pot system will not automatically apply to these members, as they will have a choice.
Certain parliamentary committee members raised concerns regarding the delayed implementation date and the maximum seed capital being increased to R30,000. These members requested that this amount should be increased to R40,000. This is still subject to 10% of the member’s savings value on 28 February 2025.
Significant reforms
The two-pot system is the latest milestone in the retirement reforms that have taken place over the last decade. This new system is exciting and will significantly enhance our retirement system. We anticipate that the implementation of this system will improve retirement outcomes for members.
The two-pot system will increase retirement savings over the longer term and will assist members in managing their more urgent financial needs. Based on certain assumptions, the two-pot system will improve members’ retirement outcomes by 2 to 2.5 times compared to the current system.
We support the implementation of the two-pot system because of the positive impact it will have on the financial future of retirement fund members. Further, we welcome the latest proposed changes announced by National Treasury.
It is important to recognise that the higher limitation on seed capital may result in higher withdrawal amounts from retirement funds. This may result (on average) in an asset outflow impact of 1% to 2% and higher claims volumes for retirement funds. This will mainly be driven by financial distress and higher indebtedness amongst fund members of South African retirement funds. Should this transpire, it will significantly impact fund administrators as they will have to process large claim volumes in a limited time. Further, this will ultimately result in lower retirement incomes for members upon retirement.
What members need to know
We encourage fund members to keep all their retirement savings invested for retirement.
Withdrawing cash from retirement savings has a financial impact, including:
- paying tax on any withdrawn amount
- reducing the retirement income members will receive upon retirement
- reducing the cash amount available to members at retirement
For these reasons, fund members must save for emergencies separately instead of relying on their savings component.
Many investment options are available which will help fund members save for emergencies; these include money market accounts, which pay interest on savings and provide members access to cash as and when they need it. The savings component of the two-pot system should be a last resort once other options have been exhausted. Members will only be able to exercise their options once the changes become effective, which is proposed as 1 March 2025.
Getting financial advice can help members plan for emergencies and make decisions about their retirement savings. Financial advice gives members the best chance of having enough to live on when they can no longer work.
How we are preparing for the two-pot system
There is an extensive legislative process which still needs to unfold. The revised Revenue Laws Amendment Bill and amendments to the Pension Funds Act were issued in June 2023.
We are awaiting a final response document from National Treasury before it can further clarify matters raised as part of industry submissions and through the parliamentary process.
Final legislation may only be available in early 2024. We are engaging with National Treasury, the Financial Sector Conduct Authority (FSCA), SARS and industry bodies throughout the process.
Based on draft legislation, we are preparing for significant changes by 1 March 2025 (the effective proposed date). These changes include administration systems, processes, digital solutions and applications, member experience and communication, advice and guidance to trustees and management committees, advice and guidance to members, as well as legal and regulatory matters, including rule amendments, solutions and services.
Retirement funds must also prepare for the implementation of the two-pot system. Our consultants are in the process of assisting trustees and management committees and will continue to do so as the legislative process unfolds. We will provide updates once we receive a final response document from National Treasury.