Author: Dave Beattie
The National Treasury, alongside the South African Revenue Service (SARS), is set to make some changes and clarifications to the original proposals on introducing the ‘two pot’ retirement system. In essence, this system seeks to strike a balance between two problems, maximizing retirement savings by minimizing early withdrawals and allowing for early access to retirement savings to address unforeseen financial challenges.
Retirement fund members could in the future make one taxable withdrawal a year from their ‘savings pot’, where up to 1/3rd of their contributions could potentially be withdrawn. The remaining two-thirds in the ‘retirement pot’ has to be preserved until retirement and used to purchase an annuity.
In practice retirement funds would be broken into the following:
- The ‘vested pot’ (amounts accumulated before the implementation date)
- 1/3 accessible ‘savings pot’
- 2/3 ‘retirement pot’ is subject to complete preservation until retirement (it is important to note that contributions after 1 March 2023 must be preserved until the retirement date).
The new system is set to come into effect on 1 March 2024.
It is important to understand that the system is not retrospective, meaning that the new rules will not affect existing retirement savings and contributions up until the date of implementation. These remaining savings and their subsequent investment return will retain their ‘vested rights’ which means that the rules that applied when the members made those contributions will continue to apply to them.
Should a member make a withdrawal from their ‘savings pot’, this amount will be added to their taxable income for the year. They would then not be permitted to make a further withdrawal from the ‘savings pot’ for a period of at least 12 months. Should the member make such a withdrawal of up to the 1/3rd pre-retirement, they will reduce or deplete the amount available as a lumpsum when they retire.
The good news is that these amendments address the historical reality that many members in financial distress had previously resigned from their employment in an attempt to have access to their retirement funds. Members will now be able to access retirement funds whilst retaining their employment. Their ‘retirement pot’ will continue to grow over their years of employment and hopefully allow the member to have some level of financial security at retirement.
There are however issues where further clarification is needed on how National Treasury would deal with the aspects of defined benefit, public sector, and legacy funds. Defined Benefit Funds and Public sector funds were under consideration and a consultative process would be undertaken with defined-benefit funds and stakeholders to consider the options available. The announced protective mechanisms also need to be explored, including increasing future contributions when a member withdrew funds before retirement. Further clarification is also expected around the possibility that members could be allowed to access their savings in the event of retrenchment.
As commendable as National Treasury’s attempt to consolidate the position on retirement benefits is, the two-pot system adds additional complexity to the tax treatment of policy withdrawals. For expatriates who have either ceased South African tax residency prior to the enactment of this system, or have done so after the enactment, or who still plan to cease their tax residency, it has now become a requirement to acquire both the Notice of Non-Resident Tax Status Letter and the Tax Compliance Status (TCS) PIN before the amounts may be released and transferred overseas. Due to the complexity of the tax treatment of retirement interests, consultation with experts is suggested to ensure that a tax efficient and compliant approach is taken in each case.
As additional information becomes available from National Treasury, we will put out additional communication in this regard.