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The Lesser of Two Evils… an update on the retirement fund Two-pot system

On 09 June National Treasury issued the revised 2023 Draft Revenue Laws Amendment Bill and 2023 Draft Revenue Administration and Pension Laws Amendment Bill for public comment.

The National Treasury proposes that the implementation date of the two-pot system remain 01 March 2024. The two-pot system is a system where South Africans will be able to access one-third of their retirement savings throughout their career, while two-thirds will only become accessible on retirement. The objectives of the proposed two-pot system are to strike a balance between promoting the preservation of retirement benefits and providing access to emergency funds while individuals are still employed. 

Based on the two-pot reform, a member’s fund credit will be classified as being a vested pot, a saving pot and a retirement pot. The fund credit needs to reflect the same categorisation across when there are transfers between administrators and benefit statements. What retirement funds need to do is to ensure that all the fund credit records for members younger than 55 on any administration system are aligned to the new naming convention for all fund credit records up to 29 February 2024.

Treatment of Seed Capital and Proposed Changes to Retirement Fund Withdrawals

The National Treasury provided more clarity on how to treat seed capital where provision is made for a member of a retirement fund to access a portion of the available fund credit on 01 March 2024. The seeding amount is proposed to be limited to 10% of their available fund credit on 29 February 2024, but capped at R25,000, and will be transferred to the member’s savings pot which renders it immediately accessible for annual withdraw. These withdrawals will be taxable according to the marginal tax rates table. There is also a proposal to include defined benefit funds in an equitable manner. These funds will be allowed to calculate one third of the member’s contributions to the savings pot based on one third of the member’s pensionable service increase, and two-thirds contributions to the “retirement component” based on two-thirds of the member’s pensionable service increase with effect from 1 March 2024. In addition, it is proposed that legacy annuity retirement funds (issued before 01 January 2022) be exempted from the provisions of the two-pot system as this would require a complete re-design of some of these policies.

Expected challenges when the proposed two-pot system comes into effect include an increased volume of claims that the administrators may receive and having the necessary liquidity in the retirement fund for paying out member claims. Any withdrawals will be taxed according to the marginal rates thus the administrators will rely heavily on SARS’s ability to process the increase in volumes.

What may be a risk, in the long run, is that behavioural finance shows that for most people, it is more important to have money now than money later, and in this case, retirement. The system of having mandatory pension funds is aimed at making sure that people don’t only focus on current consumption but on creating wealth for consumption in their years of retirement. Whilst the two-pot system also tries to avail funds for emergencies, there is no guarantee that benefit withdrawals from the savings pot will be used only for emergencies and no other non-emergency items.

The National Treasury invited the public to comment on the revised proposal by the 15th July2023.

Johan Gouws, Head of Advice provided more insight on the Two-pot system in his last piece here  

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About the Author

Bongiwe Momoza
Senior Asset Consultant, Sasfin Wealth

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